UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON, D.C.
20549





FORM 10-KSB


ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE


SECURITIES
EXCHANGE ACT OF 1934


For
the fiscal year ended December 31, 2007





Commission
File No. 333-36379





PACIFICHEALTH
LABORATORIES, INC.


(Name of Small Business Issuer in Its
Charter)





Delaware
            
            22-3367588(State or jurisdiction
      of
            
            (I.R.S.
      Employerincorporation or
      organization)
            
            Identification
      No.)





100
Matawan Road, Suite 420


Matawan,
NJ 07747


(Address of principal executive
offices)





732/739-2900


(Issuer’s telephone
number)





Internet
Website: www.pacifichealthlabs.com





Securities
registered under Section 12(b) of the Exchange Act:  None





Securities
registered under Section 12(g) of the Exchange Act: Common Stock, par value
$.0025 per share.





Check
whether the issuer is not required to file reports pursuant to Section 13 or 15
(d) of the Exchange Act. o




Check
whether the issuer (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes x  No o




Check if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB.  x




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 under the Exchange Act).   Yes o  No x




The
issuer’s revenues for its most recent fiscal year were $7,427,857.




As of
March 5, 2008, the aggregate
market value of the common stock held by non-affiliates based on
the closing sale price of Common Stock was $4,848,154.




As of
March 5, 2008, the issuer had 13,501,426 shares of common stock outstanding.




Transitional
Small Business Disclosure Format (check one): Yes o No x













PACIFICHEALTH
LABORATORIES, INC.


FORM
10-KSB




FISCAL
YEAR ENDED DECEMBER 31, 2007






TABLE
OF CONTENTS




Note
      Concerning Forward Looking Information
              3PART
      IITEM
      1.
              BUSINESS.
              4ITEM
      2.
              DESCRIPTION
      OF PROPERTY
              10ITEM
      3.
              LEGAL
      PROCEEDINGS
              10ITEM
      4.
              SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS
              10PART
      IIITEM
      5.
              MARKET
      FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND
      SMALLBUSINESS ISSUER PURCHASES OF EQUITY SECURITIES
              10ITEM
      6.
              MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIALCONDITION
      AND RESULTS OF OPERATIONS
              11ITEM
      7.
              FINANCIAL
      STATEMENTS
              15ITEM
      8.
              CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ONACCOUNTING
      AND FINANCIAL DISCLOSURE
              15ITEM
      8A(T)
              CONTROLS
      AND PROCEDURES
              15ITEM
      8B.
              OTHER
      INFORMATION
              16PART
      IIIITEM
      9.
              DIRECTORS,
      EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND
      CORPORATEGOVERNANCE; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE
      ACT
              16ITEM
      10.
              EXECUTIVE
      COMPENSATION
              19ITEM
      11.
              SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
      ANDRELATED STOCKHOLDER MATTERS
              24ITEM
      12.
              CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTORINDEPENDENCE
              27ITEM
      13.
              EXHIBITS
              28ITEM
      14.
              PRINCIPAL
      ACCOUNTANTS’ FEES AND SERVICES
              28




2






NOTE CONCERNING
FORWARD-LOOKING STATEMENTS
 
 This
Annual Report on Form 10-KSB contains forward-looking statements concerning our
financial condition, results of operations and business, including, without
limitation, statements pertaining to:
 
 ·
              The
      development of new products and the expansion of the market for our
      current products;
 ·
              Implementing
      aspects of our business
plans;
 ·
              Financing
      goals and plans;
 ·
              Our
      existing cash and whether and how long these funds will be sufficient to
      fund our operations; and
 ·
              Our
      raising of additional capital through future equity
      financings.
 
 These
and other forward-looking statements are primarily in the sections entitled
"Item 6  - Management's Discussion and Analysis of Financial
Conditions and Results of Operations" and "Item 1 - Business." Generally, you
can identify these statements because they use phrases like "anticipates,"
"believes," "expects," "future," "intends," "plans," and similar terms. These
statements are only predictions. Although we do not make forward-looking
statements unless we believe we have a reasonable basis for doing so, we cannot
guarantee their accuracy, and actual results may differ materially from those we
anticipated due to a number of uncertainties, many of which are unforeseen. You
should not place undue reliance on these forward-looking statements, which apply
only as of the date of this Report. Our actual results could differ materially
from those anticipated in these forward-looking statements for many reasons,
including those stated in this Report.
 
 We
believe it is important to communicate our expectations to our investors. There
may be events in the future, however, that we are unable to predict accurately
or over which we have no control.  Cautionary language in this Report
provides examples of risks, uncertainties and events that may cause our actual
results to differ materially from the expectations we describe in our
forward-looking statements. Such factors include, among other things, risks and
uncertainties discussed throughoutItem
1 – Business and Item 6 – Management’s Discussion and Analysis of Financial
Condition and Results of Operations.
 
 We
are not obligated to publicly update or revise any forward-looking statement,
whether as a result of new information, future events or otherwise, except as
otherwise required by law. In light of these risks, uncertainties and
assumptions, the forward-looking events discussed in this Report and other
statements made from time to time from us or our representatives might not
occur. For these statements, we claim the protection of the safe harbor for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995.
  3
 PART
I
 
 
 ITEM
1.                      BUSINESS.
 
 1(a)         Business
Development
 
 PacificHealth
Laboratories (hereinafter referred to as “the Company”, “us”, or “we”) is a
nutrition technology company that was incorporated in the state of Delaware in
April 1995.  Our mission is to conceive, develop and commercialize
specific and scientifically validated nutrition tools in the areas of fitness
development and weight regulation to improve our consumer’s performance in life.
Our products are substantiated by clinical trials conducted at leading
university research centers. Our principal areas of focus include sports
performance, weight loss, and management of Type II diabetes. Our products can
be marketed without prior Food and Drug Administration (“FDA”) approval under
current regulatory guidelines. We commercialize our technologies using multiple
strategies including licensing and/or direct sales via targeted consumer
channels.  As detailed in Item 1(b) below, on February 22, 2006, we
sold to Mott’s LLP the patents, trademarks, web sites and other intellectual
property related to our ACCELERADE®
and ENDUROX®
sports nutrition product lines, and we entered into a license agreement with
Mott’s that gives us the exclusive, royalty-free right to continue to sell these
products in powder, gel and pill form.
 
 1(b)         Business
of the Issuer
 
 We are
focused on developing patented protein-based nutrition products using two core
technology platforms.  One platform involves the activation of
biochemical pathways by specific nutritional compositions to enhance muscle
growth, energy, and transport pathways.  Using this nutritional
technology platform, our research efforts have been directed to product
development for 1) improving exercise performance, 2) post-surgical muscle
recovery, and 3) oral rehydration.  The second technology platform
involves stimulation of specific satiety peptides that are released in the
stomach.  Using this nutritional technology platform, our research
efforts have been directed in product development for 1) appetite suppression
and weight loss, and 2) management of Type II diabetes.
 
 Activation
of Muscle Growth, Energy, and Transport Pathways
 
 Exercise
Performance
 Our
research into factors influencing exercise performance and muscle growth and
recovery has led to the development and commercialization of a new generation of
sports/recovery drinks and supplements.  The key to our drink
technology is the specific ratio in which protein is combined with
carbohydrate.  We have two patents on this
technology.   Over 18 studies have been published demonstrating
that products based on this technology can extend endurance, reduce muscle
damage, improve rehydration, and accelerate muscle recovery.  Based on
this research, we have commercialized a number of products
including:
 
 ·
              ENDUROX
      EXCEL®  -
      Introduced in March 1997
  ·
              ENDUROX
      R4®
      Recovery Drink – Introduced in February
1999
  ·
              ACCELERADE®
      Sports Drink – Introduced in May
  2001
  ·
              ACCEL
      GEL®
      Energy Gel – Introduced in February
2004
  
 OnFebruary 22, 2006, pursuant
to an Asset Purchase Agreement of the same date, we sold to Mott’s LLP
(“Mott’s”), a division of Cadbury Schweppes Americas Beverages (“CSAB”), the
patents, trademarks, web sites, and other intellectual property related to the
ourACCELERADEand
ENDUROX sports nutrition product lines for $4,000,000 in cash and potential
future royalty payments.  Simultaneously, we entered into a License
Agreement with Mott’s giving us the exclusive, royalty-free right to continue to
sell our sports nutrition products in powder, gel and pill
form.  Consequently, we will continue to sell our current sports
nutrition products in the same manner as prior to the sale of the intellectual
property assets.
  4
  We
will receive royalty payments from Mott’s for a finite period, subject to an
annual limitation on the amount of the royalty.  There are no annual
minimum royalties. Mott’s launched ACCELERADE
Ready To Drink (“RTD”) in the second quarter of 2007. Going forward, we believe
Mott’s intends to focus ACCELERADE
RTD exclusively on targeted channels and classes of trade and accounts where
they expect the product to be financially viable.
 
 Post-Surgical
Muscle Recovery
 Scientific
insights emanating from our discoveries in sports nutrition have led to a
potentially new and exciting medical application.  Individuals
undergoing orthopedic surgery, particularly involving the shoulder, hip or knee,
experience muscle atrophy that occurs as a normal consequence of muscle
immobilization in the post-surgical period. The degree of muscle atrophy a
patient experiences significantly impacts health care costs and quality of life.
We are currently evaluating a novel nutritional formulation that has the
potential of slowing muscle atrophy following a period of forced
immobilization.  Such a product could have enormous benefit for the
1.6 million patients who undergo arthroscopy and muscle and knee replacement
operations each year, and the 5 million patients who suffer a sports related
injury.  A clinical study to examine the effectiveness of this
formulation is underway. We have filed one patent on this technology and plan to
file additional patents in the future.
 
 Oral
Rehydration
 Another
scientific byproduct of our research on the effects of protein has been the
identification of nutritional formulas that can enhance sodium transport. Such
products would have widespread medical application in treating dehydration
commonly associated with vomiting and diarrhea. We will continue our studies and
may file patents for this indication in 2008.
 
 Activation
of Satiety Peptides
 
 Weight
Loss.
 Satiety
peptides have been shown to reduce food intake and suppress appetite in
humans.  Our research has specifically focused on developing
nutritional formulations that can stimulate cholecystokin (CCK), one of the
body’s primary satiety peptides. CCK is normally released after a meal,
particularly one high in fat and protein.  CCK is often called the
“feel full” protein because when it is released it gives a feeling of fullness
and signals the brain to terminate the meal.  The objective of our
research is to develop a nutritional composition that stimulates and extends the
duration of action of CCK in a calorically efficient way, i.e. to cause a
release of CCK with 45-50 calories of specific nutrients rather than 1,000
calories.
  The first
product we commercialized using this technology was SATIETROL®
that was released in April 2000.  This was followed by the
introduction of a meal replacement product called SATIETROL COMPLETE®
in January 2001.  Clinical studies showed that both of these products
could reduce hunger and reduce caloric intake.  In June 2001, we
signed an exclusive worldwide licensing agreement with GlaxoSmithKline (“GSK”)
for our weight loss technology. Under the agreement, we received an initial
payment of $1,000,000 and received a subsequent milestone payment of $250,000.
GSK subsequently terminated the agreement in September 2002 with all rights
reverting back to us.
  We have
continued research in this area in order to develop a more effective composition
that could be incorporated into different forms (ready-to-drink beverage and
chewable tablet) and also has the potential to be added to food and increase the
satiation property of the food to which it was added.  Starting in the
third quarter of 2003, the Company funded a number of clinical studies on an
improved formulation.  The new formulation was shown to be
significantly better than the previous product in reducing caloric intake,
slowing gastric emptying, and extending a feeling of satiation following a
meal.  We have seven patents on our appetite suppressant technology
with additional patents pending.  We launched a ready-to-drink
beverage using this improved technology under the trade name SATIATRIM®
in January 2007.
  Type
II Diabetes
 Our
appetite suppression technology may also have potential for the treatment of
Type II diabetes, the fastest growing chronic condition in the U.S., affecting
an estimated 46 million people. We have instituted clinical trials to measure
the effectiveness of our formulation in controlling blood glucose.
  All of
our existing and proposed products are expected to be manufactured in the United
States by third parties.  See item 1(b)(i) below.
  5
  1(b)(i)  Principal
Products and Markets
 
 (a) ENDUROX
EXCEL Dietary Supplement
 
 ENDUROX
EXCEL is a dietary supplement of which the principal ingredient is the herb
ciwujia.  Laboratory studies funded by us during 1995 at the
University of North Texas Health Science Center inFort
Worth,Texasand
theInstituteofNutritionand
Food inChina,
have demonstrated that ENDUROX EXCEL can have a beneficial effect on exercise
performance. In December 1996, we were issued United States Patent No. 5,585,101
for our ENDUROX product.
 
 (b)
ENDUROX R4Recovery
Drink
 
 We
launched ENDUROXR4Recovery Drinkin
March 1999.  Clinical trials funded by us during 1998 at the
University of North Texas Health Science Center in Fort Worth, Texas and the
Human Performance Lab at St. Cloud University in St. Cloud, Minnesota showed
that when tested against the nation’s leading sports drink, ENDUROX R4delivered equal hydration effectiveness while enhancing performance and
extending endurance by 55%, decreasing post-exercise muscle stress by 36%,
reducing free radical build-up by 69%, and increasing the replenishment of
muscle glycogen following exercise. These results have been published in a
peer-reviewed journal. In April 2000, we were issued patent United States Patent
No. 6,051,236 for ENDUROXR4.
Patent
office acceptance of specific claims does not necessarily permit us to make any
specific claims to the public regarding this product.  Our ability to
make those claims is governed by the FDA, Federal Trade Commission, and other
federal government agency regulations and guidelines.
 
 (c)ACCELERADESports
Drink
 
 In June
2001, we introduced ACCELERADE
Sports Drink.  ACCELERADE
Sports Drink is the first sports drink that contains protein.  Studies
sponsored by the Company and done independently by university researchers and
published in peer-reviewed journals have demonstrated that, compared to a
conventional sports drink such as Gatorade, ACCELERADE
improves endurance by 29%, decreases muscle damage by 83%, improves muscle
recovery by 46%, and improves rehydration by 15%.  To date, there are
over 18 published studies on ACCELERADE.  In
January 2006, we received a specific patent on this formula.
 
 (d)
ACCEL GEL Energy Gel
 
 In
February 2004, we introduced ACCEL GEL.  ACCEL GEL is an energy gel
that contains the patented 4:1 ratio found in ENDUROX R4 and ACCELERADE.  ACCEL
GEL is designed to provide athletes in all sports with a quick and rapid source
of carbohydrate energy.  Studies sponsored by the Company and
published in a peer-reviewed journal have shown that Accel Gel, compared to the
leading carbohydrate gel, improves endurance performance by 13%.
 
 ENDUROX
R4, ACCELERADE,
and ACCEL GEL are distributed in health foods chains (GNC, Vitamin Shoppe,
Vitamin World), sporting goods retailers (REI), cycling stores and catalogs
(Performance Bike), running stores and catalogs (Road Runner Sports), and sports
specialty stores.
 
 1(b)(ii)  Distribution
Methods
 
 We have
pursued a “multi-channel” distribution strategy in marketing our endurance
products. At the present time, these products are being sold in over 9,000
retail outlets including GNC, sports specialty stores, independent health food
retailers, independent bike retailers, health clubs, catalogs, and Internet
sites. We now sell all of our products in various foreign countries through
independent distributors.
 
 To
support our marketing efforts, we may use a variety of marketing methods
including advertising in trade and consumer sports and health food magazines
that are intended to reach our targeted consumer. In addition, we may attend
trade shows and exhibitions, sponsor promotional programs/events and in-store
promotions, and engage in public relations efforts that has resulted and may
continue to result in articles in numerous sports, health, fitness, trade and
natural product publications, newspaper coverage, radio, and television
spots.
  6
  In
the years ended December 31, 2007 and December 31, 2006, our expenditures for
product advertising and promotion wereapproximately $159,000 and
$105,000, respectively. Advertising expenditures increased in 2007 due to the
launch of SATIATRIM, our natural appetite suppressant
product.
 
 1(b)(iii)  Status
of Publicly Announced New Products
 
 The
status of all products that have been the subject of or mentioned in public
announcements by us in the past year are discussed above under the caption
“1(b)(ii) - Principal Products and Markets”.
 
 1(b)(iv)  Competition
 
 In
the exercise performance market, following the asset sale of our sports drink
intellectual property to Mott’s, we will only be manufacturing and distributing
powder versions ofACCELERADEand
ENDUROX R4 as well as ACCEL GEL.  Our primary marketing focus will be
the serious endurance athlete (cyclist, runner, triathlete and swimmer), as well
as team sports.  There are a number of companies that currently market
products that compete with ENDUROX R4 andACCELERADE.  The
major companies include Cytosport, PowerBar, EAS, and Clif Bar.Increased
competitive activity from such companies could make it more difficult for us to
establish market share since such companies have greater financial and other
resources available to them and possess far more extensive manufacturing,
distribution and marketing capabilities than we
do.
 
 The weight loss market in
which SATIATRIM will compete is highly competitive.  Weight loss
products tend to fall into four categories including: herbal supplements, meal
replacement products (e.g., Slim Fast), food plans (e.g., Weight Watchers) and
prescription products (e.g., Xenical). Today,
weight loss products are manufactured by dietary supplement manufacturers,
pharmaceutical manufacturers, diet food companies, and over-the-counter drug
companies. Intense competitive activity in this market could make it difficult
for us to establish market share, as
most of the companies that have products in this category have greater
financial, marketing, sales, manufacturing, and distribution resources than we
have.
 
 We
believe that long-term success in the marketplace for any of our products will
be dependent on the proprietary nature of our formulas, as well as such factors
as distribution and marketing capabilities.
 
 1(b)(v)  Suppliers
of Raw Materials
 
 We
do not have manufacturing facilities and have no present intention to
manufacture any products ourselves.  We fulfill product needs through
relationships with independent manufacturers.  We generally do not
have long-term contracts with any of these manufacturers.  Competitors
that do their own manufacturing may have an advantage over us with respect to
pricing, availability of product, and in other areas because of their control of
the manufacturing process.
 
 Generally,
our contract manufacturers obtain raw materials necessary for the manufacture of
our products from numerous sources. We generally do not have contracts with
suppliers of materials required for the production of our
products.  All raw materials used in our existing products are
available from multiple sources.
 
 There
is no assurance that suppliers will provide the raw materials needed by us in
the quantities requested or at a price we are willing to pay.  Because
we do not control the source of these raw materials, we are also subject to
delays caused by interruption in production of materials based on conditions
outside of our control.
 
 1(b)(vi)  Dependence
on Major Customers
 
 GNC and Performance, Inc.
accounted for approximately 21% and 15%, respectively, of net sales in 2007 and
43% and 19%, respectively, of net accounts receivable at December 31, 2007.Deferred
revenuefor
consigned inventory at GNC was $559,876 as of December 31, 2007.The
loss of these customers, a significant reduction in purchase volume by these
customers, or the financial difficulty of such customers, for any reason, could
significantly reduce our revenues. We have no agreement with or commitment from
either of these customers with respect to future
purchases.
  7
  1(b)(vii)  Patents
and Trademarks
 
 The
following describes the patents and trademarks we have obtained related to our
sports nutrition products and our weight loss technology.  On February
22, 2006, we sold the patents and trademarks related to ourACCELERADEand
ENDUROX line of sports nutrition products to Mott’s, subject to an exclusive
license back to us to continue to market the powder, gel and pill form of these
products.
 
 We
received a use patent, United States Patent No. 5,585,101, in December 1996
covering the use of ciwujia, the principal active herb in ENDUROX and ENDUROX
EXCEL caplets, entitledMethod to Improve Performance During Exercise
Using the Ciwujia Plant.
This patent expires in December 2013.
 
 We
received a composition of matter patent, United States Patent No. 6,051,236, in
April 2000 entitled Composition for Optimizing Muscle Performance During
Exercise (see Item 1(b)(i)(b)). This patent expires in April
2017.
 
 We
received a composition of matter patent, United States Patent No. 6,207,638, in
March 2001 entitledNutritional
Intervention Composition for Enhancing and Extending Satiety(see
Item 1(b)(i)(c)). This patent expires in March
2018.
 
 We
received a use patent, United States Patent No. 6,429,190, in August 2002
entitledMethod
For Extending The Satiety Of Food By Adding A Nutritional Composition Designed
To Stimulate Cholecystokinin (CCK).
This patent expires in August 2019.
 
 We
received a composition of matter patent, United States Patent No. 6,436,899, in
August 2002 entitledNutritional
Intervention Composition for Enhancing and Extending Satiety.
This patent expires in August 2019.
 
 We
received a composition of matter patent, United States Patent No. 6,468,962, in
October 2002 entitledNutritional
Intervention Composition for Enhancing and Extending Satiety.
This patent expires in October 2019.
 
 We
received a composition of matter patent, United States Patent No. 6,558,690, in
May 2003 entitledNutritional
Intervention Composition for Improving Efficacy of a Lipase Inhibitor.This
patent expires in May 2020.
 
 We
received a composition of matter patent, United States Patent No. 6,716,815, in
April 2004 entitledNutritional
Intervention Composition for Enhancing and Extending Satiety.This
patent expires in April 2021.
 
 We
received a composition of matter patent, United States Patent No. 6,838,431, in
January 2005 entitledNutritional
Intervention Composition Containing Protease Inhibitor Extending Post Meal
Satiety.This
patent expires in January 2022.
 
 We
received a composition of matter patent, United States Patent No. 6,989,171, in
January 2006 entitledSports Drink Composition For Enhancing Glucose
Uptake and Extending Endurance During Physical Exercise.This
patent expires in January 2023.
 
 We
also have several patents pending on our technology.  To the extent
these are improvements on our existing sports drink patents, Mott’s will own
these patents, but we will have an exclusive license to use them in powder, gel
and pill products.
 
 The
patent holder for all patents is our CEO and President, Dr. Robert
Portman.  Our policy is to have all patentsassigned to us upon
filing. Patent Nos. 6,051,236
and 6,989,171above have been assigned to Mott’s.
To the extent we do not have patents on our products, there can be no assurance
that another company will not replicate one or more of our
products.  Nor is there any assurance that existing or future patents
will provide meaningful protection or significant competitive advantages over
competing products. For example, our use patent on ciwujia would not prevent the
sale of a product containing that herb with a claim or for a use that was not
covered by our patent.
 
 8
 We
also obtained federal trademark registrations for ENDUROX EXCEL, ENDUROX
R4,ACCELERADE,ACCEL
GEL,and
SATIATRIM among others.We
also have filed our trademarks in most Western European countries,Canada,MexicoandJapan.
Our policy is to pursue registrations for all of the trademarks associated with
our key products, and to protect our legal rights concerning the use of our
trademarks. We rely on common law trademark rights to protect our unregistered
trademarks.
 
 1(b)(viii)
and (ix)  Governmental Regulation
 
 We
have determined that all of our existing and proposed products, as described
above, are nutritional or dietary supplements as defined under federal statutes
and regulations of the FDA. Neither nutritional supplements nor dietary
supplements require FDA or other governmental approval prior to their marketing
in theUnited
States.  No
governmental agency or other third party makes a determination as to whether our
products qualify as nutritional supplements, dietary supplements, or
neither.  We make this determination based on the ingredients
contained in the products and the claims made for the products.  The
processing, formulation, packaging, labeling and advertising of such products,
however, are subject to regulation by one or more federal agencies, including
the FDA, the Federal Trade Commission, the Consumer Products Safety Commission,
the Department of Agriculture and the Environmental Protection Agency. Our
activities also are subject to regulation by various agencies of the states and
localities in which our products are
sold.
  We
market products that are covered under two types of FDA regulations, Nutritional
Supplements and Dietary Supplements.  Nutritional Supplements contain
food and GRAS (Generally Regarded as Safe) ingredients and do not require FDA
approval or notification.  Such products must follow labeling
guidelines outlined by the FDA.
 
 Dietary
Supplements is a classification of products resulting from the enactment of the
Dietary Supplement Health and Education Act of 1994 (the "DSHEA") in October
1994. The DSHEA amended and modified the application of certain provisions of
the Federal Food, Drug and Cosmetics Act (the "FFDC Act") as they relate to
dietary supplements, and required the FDA to promulgate regulations consistent
with the DSHEA.
 
 The
DSHEA defines a dietary supplement to include (i) any product intended to
supplement the diet that bears or contains a vitamin, mineral, herb or other
botanical, an amino acid, a substance to supplement the diet by increasing the
total dietary intake, or any concentrate, constituent, extract, or combination
of any such ingredient, provided that such product is either intended for
ingestion in tablet, capsule, powder, softgel, gelcap, or liquid droplet form,
(ii) or, if not intended to be ingested in such form, is not represented for use
as a conventional food or as a sole item of a meal or the diet, and (iii) is
labeled as a dietary supplement. The practical effect of such an expansive
definition is to ensure that the new protections and requirements of the DSHEA
will apply to a wide class of products.
 
 Under
the DSHEA, companies that manufacture and distribute dietary supplements are
allowed to make any of the following four types of statements with regard to
nutritional support on labeling without FDA approval: (i) a statement that
claims a benefit related to a classical nutrient deficiency disease and
discloses the prevalence of such disease in the United States; (ii) a statement
that describes the role of a nutrient or dietary ingredient intended to affect
structure or function in humans; (iii) a statement that characterizes the
documented mechanism by which a nutrient or dietary ingredient acts to maintain
or function; or (iv) a statement that "describes general well-being" from
consumption of a nutrient or dietary ingredient. In addition to making sure that
a statement meets one of these four criteria, a manufacturer of the dietary
supplement must have substantiation that such statement is truthful and not
misleading, must not claim to diagnose, mitigate, treat, cure, or prevent a
specific disease or class of diseases, and must contain the following
disclaimer, prominently displayed in boldface type: "This statement has not been
evaluated by the Food and Drug Administration. This product is not intended to
diagnose, treat, cure, or prevent any disease."
 
 In
2000, the FDA issued new guidelines concerning statements made for dietary
supplements. These regulations have important implications for the marketing of
weight loss products, such as SATIATRIM. Previously the regulations made it
clear that a product that made a claim for obesity must be treated as a drug.
Under the regulations issued in 2000, the FDA makes a distinction between
obesity and overweight. Overweight is no longer considered a disease but rather
a natural life process. Overweight is considered a condition that affects the
structure and function of the body. As now defined, dietary supplements can make
a claim for ordinary weight loss rather than as a treatment for
obesity.  Furthermore, these regulations also permit the use of
appetite suppressant as a structure/function claim under DSHEA. The issuance of
these regulations will give us greater latitude in the types of claims that we
can make for SATIATRIM as long as we can substantiate such claims by the
necessary studies.
 
 9
 1(b)(x)  Expenditures
for Research and Development
 
 Our
research and development expenditures in the past two fiscal years, exclusive of
market research and marketing related expenditures, were approximately as
follows: 2007 -$211,000;
2006 - $196,000.We anticipate R & D expenses will increase as we conduct additional
clinical trials to seek out additional patents and claims for our
products.
 
 1(b)(xi)  Compliance
with Environmental Laws
 
 Except
as described above under Item 1(b)(viii) and (ix), we are not aware of any
administrative or other costs that we may incur which are directly related to
compliance with environmental laws, and we have not experienced any other
significant effect from the impact of environmental laws.
 
 1(b)(xii)  Employees
 
 At the present time, we
have fourteen (14) full time employees and one (1) part time employee. Of these,
three employees are executive, seven are in sales and marketing, and five are in
accounting, operations and administration.We employ a number of consultants who devote limited portions of their time to
our business. None of our employees are represented by a union, and we believe
that our employee relations are good.
 
 ITEM
2.                      DESCRIPTION
OF PROPERTY
 
 We have a
lease agreement for office space in Matawan, NJ for the rental of 5,500 square
feet expiring June 2012. Rent including utilities will be $140,250 annually for
the first 36 months; $145,750 annually for the next 12 months; and $151,250
annually for the last 12 months.
 
 We
do not intend to develop our own manufacturing capabilities, because management
believes that the availability of manufacturing services from third parties on a
contract basis is more than adequate to meet our needs in the foreseeable
future.
 
 We
do not own any real property nor do we have any real estate
investments.
 
 ITEM
3.                   
LEGAL PROCEEDINGS
 
 None.
  ITEM
4.SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
 We did not submit
any matters to a vote of our security holders in the fourth quarter of the
fiscal year ended December 31, 2007.
  
 PART
II
 
 ITEM
5.MARKET
FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND SMALL BUSINESS ISSUER
PURCHASES OF EQUITY SECURITIES.
 
 5(a)         Market
Information.
 
 Our
common stock is currently traded on the over-the-counter market on the OTC
Bulletin Board, under the symbol "PHLI".
 
 10
 The
following table sets forth the high and low sales prices of our common stock
since January 1, 2006, as reported by the OTC Bulletin Board. These quotations
reflect inter-dealer prices, without retail mark up, mark down or commissions
and may not represent actual transactions.
 
 
 Year
      ended December 31, 2007
              High       Low
 
 First
      Quarter
              $2.35       $1.08
 Second
      Quarter
              $2.65       $1.65
 Third
      Quarter
              $3.38       $1.55
 Fourth
      Quarter
              $1.80       $0.55
 
 Year
      ended December 31, 2006
              High       Low
 
 First
      Quarter
              $1.24       $0.17
 Second
      Quarter
              $2.75       $0.84
 Third
      Quarter
              $2.08       $1.02
 Fourth
      Quarter
              $1.49       $0.99
 
 On March
5, 2008, the closing price of our common stock as reported by the OTC Bulletin
Board was $0.48 per share.
 
 5(b)         Holders
 
 As of
March 5, 2008, there were approximately 102 holders of record of our common
stock. However, we believe that there are significantly more beneficial holders
of our stock as many beneficial holders have their stock in “street
name”.
 
 5(c)        
Dividends
 
 We have
never paid or declared dividends upon our common stock, and we do not
contemplate or anticipate paying any dividends on our common stock in the
foreseeable future.
 
 
 5(d)Recent
Sales of Unregistered Securities
 
 5(d)(i)     Recent
Sales of Unregistered Securities
 
 There
were no sales of unregistered securities other than as reported in prior reports
on Forms 10-KSB, 10-QSB or 8-K.
 
 Company
Repurchases
 
 We did
not repurchase any shares of our common stock in the fourth quarter of
2007.
 
 ITEM
6.MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
 
 The
following discussion and analysis should be read in conjunction with our
financial statements, including the notes thereto, appearing elsewhere in this
Report.
  11
  6(a)         Introduction
 
 We
were incorporated in April 1995 to discover, develop and commercialize
nutritional products that are patentable and substantiated by well-controlled
clinical trials conducted at leading university research centers.  Our
principal areas of focus include sports performance, weight loss, and management
of Type II diabetes.  We introduced our first product, ENDUROX, in
March 1996.  We extended our exercise performance products with the
introduction of ENDUROX R4 Recovery Drink in February 1999,ACCELERADESports
Drink in May 2001, and ACCEL GEL in February 2004.  These products are
based on our patented technology that involves the combination of carbohydrate
and protein in a specific ratio.  A number of studies, both funded by
our company and also conducted independently, demonstrate that this technology
can extend endurance, decrease post-exercise muscle damage, speed recovery and
improve rehydration.
 
 In
April 2000, we introduced our first product for weight loss that was based upon
a novel mode of action – the stimulation of one of the body’s principal satiety
peptides, cholecystokinin (CCK).  This technology was launched under
the brand name SATIETROL.  In June 2001, we licensed this product to
GSK and discontinued promotion of our brand.  In September 2002, the
license was returned to us and we initiated a program to improve both the
efficacy and form versatility of the technology.  We launched a new
ready-to-drink beverage based on this enhanced technology under the brand name
SATIATRIM in January 2007.
 
 In
February 2006, we entered into an asset sale with Mott’s, LLC, a division of
Cadbury Schweppes, (see Item 1(b)).  As part of the agreement, we will
continue to sell the powder, gel and pill forms ofACCELERADE,
ENDUROX R4 and ACCEL GEL, both in theUnited
Statesand
in those countries where we are presently doing
business.
 
 6(b)         Results
of Operations - Years Ended December 31, 2007 and 2006
 
 We
recorded a net loss applicable to common stockholders of ($1,276,059), or
($0.10) per share basic and diluted, for the year ended December 31, 2007,
compared to generating a net income applicable to common stockholders of
$2,258,577, or $0.17 per diluted share, for the year ended December 31, 2006.
The year ended December 31, 2006 would have resulted in a net loss (non-GAAP
measure) of ($372,628), or ($0.03) per share (basic and diluted), if $2,631,205
(net of income taxes of $1,278,000) from the sale of patents and technology to
CSAB were excluded from net income. See Part I, Item 1(b) above for a
description of the CSAB transaction.  The loss for the year ended
December 31, 2007 was primarily the result of three circumstances: (i) increased
marketing and other expensesof $514,901for the launch of SATIATRIM, (ii) lower gross margins as detailed below, and
(iii) the write-off of $439,208 of SATIATRIM inventory as noted below. Without
the inventory write-off, we would have recorded a net loss of ($836,851)
(non-GAAP measure) for the year ended December 31,
2007.
 
 Revenues
increased 20% in the year ended December 31, 2007 to $7,427,857 from $6,209,846
for the year ended December 31, 2006.Approximately 15% of this increase
represented volume increase and approximately 5% represented price increases
that took effect on July 1, 2007.Revenues increased for the year ended December 31, 2007 as compared to the year
ended December 31, 2006 as a result of the implementation of a new retailer
program which involved free-standing racks, the CSAB ACCELERADE Ready-to-Drink
advertising and promotional launch, increased serving sizes per canister that
resulted in additional sales dollars per canister, and the expansion of the
number of ACCELERADE and ACCEL GEL products carried by some of our larger
accounts. CSAB launched ACCELERADE Ready-to-Drink on June 21,
2007.
 
 For the
year ended December 31, 2007, gross profit margin was 34.2% compared to 44.0%
for the year ended December 31, 2006. For the year ended December 31, 2007,
gross profit margin on product sales (non-GAAP measure, see SATIATRIM write off
below) was 40.1% compared to 44.0% for the year ended December 31, 2006. We
experienced a change in our product mix and, in order to fully take advantage of
the CSAB advertising spend, we redesigned all ACCELERADE and ACCEL GEL packaging
to conform to the new CSAB ACCELERADE RTD packaging. To flush out old inventory,
we aggressively discounted these products in early 2007, leading to lower gross
profit margins. We wrote off approximately $49,000 of non CSAB-type packaging
material, which is the equivalent of 0.7% of 2007 revenues.  We
experienced cost of production and raw material price increases, specifically
whey protein, in our finished products from 2006 to 2007. We also experienced a
significant increase in freight costs coupled with our decision to provide free
freight to more customers as a sales incentive. To address these issues, we
implemented our first ever price increase effective July 1,
2007.  This price increase met no resistance in the market
place.
  12
  During
the quarter ended September 30, 2007, we wrote off $439,208 of SATIATRIM
inventory that had expiration dates between December 2007 and January 2008. We
used this inventory as sample product during its remaining useful life which
management believes will assist in its promotional efforts. Our marketing
efforts to date did not result in sufficient sales to be able to project that we
would be able to sell through this inventory before it expires.
 
 Selling,
general, and administrative (“S, G, & A”) expenses increased to $3,595,960
for the year ended December 31, 2007 from $2,917,450 for the year ended December
31, 2006. S, G, & A expenses increased primarily due to the investment in
marketing and other expenses of $514,901 associated with the launch of
SATIATRIM. Late in the second quarter, we officially launched the product via a
major public relations campaign that involved the Internet, radio, television,
and print media.
 
 Research
and development expenses were $211,078 for the year ended December 31, 2007
compared to $196,020 for the year ended December 31, 2006.  We
anticipate R & D expenses will increase as we conduct additional clinical
trials and seek out additional patents and claims for all of our
products.
 
 Depreciation
expense was $96,374 for the year ended December 31, 2007 compared to $50,905 for
the year ended December 31, 2006. Depreciation expense increased due to the
purchase of free-standing racks implemented as a result of a new retailer
program. We anticipate depreciation expense will increase as we continue to
expand this successful retailer program in 2008.
 
 Interest
expense was $3,496 for the year ended December 31, 2007 compared to $31,416 for
the year ended December 31, 2006. There was $24,634 of interest expense in 2006
incurred in connection with our accounts receivable funding from USA Funding
that was paid off upon the completion of the CSAB transaction in the first
quarter of 2006.
 
 6(c)         Liquidity
and Capital Resources
 
 Our cash
and liquidity position significantly improved with the sale on February 22, 2006
of our sports drink patents and trademarks to Mott’s for $4,000,000 cash plus
future potential royalties.  We used a portion of the cash proceeds of
this transaction to repay $277,067 owed under our accounts receivable facility,
to repay the $500,000 interest-bearing convertible note held by Hormel Health
Labs, LLC, and approximately $611,981 owed to our exclusive contract
manufacturer (an affiliate of Hormel).  Prior to this transaction, we
had experienced significant liquidity problems. As part of our growth plan, we
hired two new executives focused primarily on innovation in the areas of sports
nutrition and weight loss products. The compensation associated with these
individuals will increase our overall S, G & A for 2008. In addition, we
plan to increase our discretionary marketing expenses during the same time
frame. Although these additional cash outlays will have a direct impact upon our
statement of operations, management believes that the effects of the price
increases and estimated future sales will partially offset the above-noted cash
outlays. In consideration of the above, management believes it has sufficient
liquidity to meet its obligations as they come due. There can be no assurance
that we will not experience cash and liquidity problems again in the
future.
 
 At
December 31, 2007, our current assets exceeded our current liabilities by
approximately $3,496,000 with a ratio of current assets to current liabilities
of approximately 4.3 to 1. At December 31, 2006, our current assets exceeded our
current liabilities by approximately $3,874,000 with a ratio of current assets
to current liabilities of approximately 4.1 to 1. At December 31, 2007, cash on
hand was $1,712,713, a decrease of $851,325 from December 31, 2006, primarily as
the result of an increase of $207,389 in accounts receivable, an increase in
inventory of $97,171, a decrease in prepaid expenses of $32,387, a decrease in
accounts payable and accrued expenses of $488,282, net repayments of notes
payable of $28,122 and an increase in deferred revenue of $315,679 from December
31, 2006. Accounts receivable increased at December 31, 2007 from December 31,
2006 due to higher revenues in the fourth quarter of 2007 as compared to the
fourth quarter of 2006.  Deferred revenue increased as a major
customer took on additional products and increased its inventories in 2007. In
addition, we issued common stock in connection with sales of common stock and
exercises of options and warrants resulting in proceeds of $733,586 during
2007.
 
 13
 In 2007,
capital expenditures amounted to $207,218 consisting mostly of permanent point
of display racks for our retail customer base. We have no material commitments
for capital expenditures.
 
 6(d)         Impact
of Inflation
 
 We
expect to be able to pass inflationary increases for raw materials and other
costs on to our customers through price increases, as required, and do not
expect inflation to be a significant factor in our business. However, our
operating history is very limited, and this expectation is based more on
observations of our competitors' historic operations than our own
experience.
 
 6(e)         Seasonality
 
 Sports
nutrition products tend to be seasonal, especially in the colder climates. Lower
sales are typically realized during the first and fourth quarters and higher
sales are typically realized during the second and third fiscal quarters. We
also plan our advertising and promotional campaigns for the ENDUROX R4and ACCELERADEproducts around these seasonal demands. Weight loss products also have
seasonality with greater sales seen in the first and second quarters as a result
of consumers’ New Year’s resolutions and desire to “get into shape” for the
summer. Similarly, we planned advertising and promotional expenditures for
SATIATRIM to take advantage of this seasonality.  We believe that the
impact of new product introductions and marketing promotions associated with the
introduction of new products will have a far greater impact on our operations
than industry and product seasonality.
  6(f)         
Impact of Recently Issued Financial Accounting Standards
  In September 2006,
the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value
Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework
for measuring fair value, and expands disclosure requirements regarding fair
value measurement. Where applicable, this statement simplifies and codifies fair
value related guidance previously issued within U.S. generally accepted
accounting principles. SFAS 157 is effective for financial statements issued for
fiscal years beginning after November 15, 2007, and interim periods within those
fiscal years.  We do not expect SFAS 157 to have a material impact on
our results of operations or financial condition.
 
 In February 2007,
the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and
Financial Liabilities - Including an Amendment of FASB Statement No.
115”  (“SFAS 159”). SFAS 159 provides companies with an option to
measure, at specified election dates, certain financial instruments and other
items at fair value that are not currently measured at fair value. A company
that adopts SFAS 159 will report unrealized gains and losses on items for which
the fair value option has been elected in its financial results during each
subsequent reporting date. SFAS 159 also establishes presentation and disclosure
requirements designed to facilitate comparisons between entities that choose
different measurement attributes for similar types of assets and liabilities.
SFAS 159 is effective for fiscal years beginning after November 15, 2007. We do
not expect SFAS 159 to have a material impact on our results of operations or
financial condition.
 
 In December 2007,
the SEC issued Staff Accounting Bulletin No. 110, “Amendment of Topic14,
Shared-Based Payment” (“SAB 110”).  SAB 110 expresses the views of the
staff regarding the use of a “simplified” method, as discussed in SAB No. 107,
in developing an estimate of the expected term of “plain vanilla” share options
in accordance with SFAS 123R (revised 2004).  We do not expect SAB 110
to have a material impact on its results of operations or financial
condition.
 
 6(g)         Off-Balance
Sheet Arrangements
 
 There
are no off-balance sheet arrangements between us and any other entity that have,
or are reasonably likely to have, a current or future effect on our financial
condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures, or capital resources that is
material to investors.
 
 14
 
 6(h)         Critical
Accounting Policies
 
 Our
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America. Certain accounting policies
have a significant impact on amounts reported in financial statements. A summary
of those significant accounting policies can be found in Note A to our financial
statements.  The more significant accounting policies involving
estimates are described below.
  In
preparing financial statements in conformity with generally accepted accounting
principles in the United States of America, we are required to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the financial
statements and revenues and expenses for the reporting period covered thereby.
Actual results could differ from those estimates.
  Among
such estimates made by management in the preparation of our financial statements
are the determinations of the allowance for doubtful accounts, inventory
valuation, and revenue recognition as it relates to customer returns. The
allowance for doubtful accounts is determined by assessing the realizability of
accounts receivable by taking into consideration the value of past due accounts
and collectability based on credit worthiness of such customers. We assess the
realizability of inventories by reviewing inventory to determine the value of
items that are slow moving, lack marketability, and by analysis of the shelf
life of products. Estimates are made for sales returns based on historical
experience with actual returns. Certain of our products are subject to minimum
sales thresholds by a significant retail customer. These sales thresholds are
based on quantities sold- through at the retail level. We record revenue with
respect to these products at the time the goods are sold-through to the end user
as reported to us by the customer. We analyze retail sell-through data provided
by the customer and our expectations of future customer sell-through trends.
Based upon this information, we determine if any reserves for returns are
necessary. Our financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of
America.
 
 ITEM
7.                      FINANCIAL
STATEMENTS
 
 Financial
information required in response to this Item of Form 10-KSB is set forth at
pages F-1 through F-15 of this Report.
  ITEM
8.CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
 
 None.
 
 ITEM
8A(T)               CONTROLS
AND PROCEDURES
 
 (a)           Evaluation
of Disclosure Controls and Procedures
 
 Based on
their evaluation of our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934,
as amended (the "Exchange Act")) as of December 31, 2007, our chief executive
officer and chief financial officer have concluded that our disclosure controls
and procedures are designed to ensure that information required to be disclosed
by us in the reports that we file or submit under the Exchange Act is recorded,
processed, summarized, and reported within the time periods specified in the
SEC's rules and forms and is accumulated and communicated to the company’s
management, as appropriate, to allow timely decisions regarding required
disclosure, and are operating in an effective manner.
  (b)           Changes
in Internal Controls Over
Financial Reporting
 
 During
the fiscal quarter ended December 31, 2007, there were no changes in our
internal control over financial reporting that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
 
 15
 
 MANAGEMENT’S
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
 
 The management of
the company is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f)
under the Securities Exchange Act of 1934, as amended. The company’s internal
control over financial reporting is designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles.  The company’s internal control over financial
reporting includes those policies and procedures that:
 
 (i)
              pertain
      to the maintenance of records that, in reasonable detail, accurately and
      fairly reflect the transactions and dispositions of the assets of the
      company;
 
 (ii)
              provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of financial statements in accordance with U.S. generally
      accepted accounting principles, and that receipts and expenditures of the
      company are being made only in accordance with authorizations of
      management and directors of the company;
and
 
 (iii)
              provide
      reasonable assurance regarding prevention or timely detection of
      unauthorized acquisition, use or disposition of the company’s assets that
      could have a material effect on the financial
  statements.
 
 Because of
inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to
future periods are subject to risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
 
 The company’s
management assessed the effectiveness of the company’s internal control over
financial reporting as of December 31, 2007. In making this assessment,
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control-Integrated
Framework. Based on management’s assessment and those criteria, management has
concluded that the company’s internal control over financial reporting was
effective as of December 31, 2007.
 
 This annual report
does not include an attestation report of the company’s registered public
accounting firm regarding internal control over financial
reporting.  Management’s report was not subject to attestation by the
company’s registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the company to provide only
management’s report in this annual report.
 
 
 ITEM
8B                   
OTHER INFORMATION
 
 None.
 
 PART
III
 
 ITEM
9.DIRECTORS,
EXECUTIVE OFFICERS, PROMOTERS,
CONTROL PERSONS,AND
CORPORATE GOVERNANCE;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE
ACT
 
 9(a)         Directors
and Executive Officers
 Our
directors and executive officers as of the date of this Report are as
follows:
 
 Name
              PositionRobert
      Portman, Ph.D.
              Chairman
      of the Board of Directors, Chief Executive Officer, and Chief Scientific
      OfficerJason
      Ash
              President,
      Chief Operating Officer, and
Director
  16
  Stephen
      P. Kuchen
              Chief Financial
      Officer, Treasurer, Secretary, and
      DirectorDavid
      Portman
              DirectorMichael
      Cahr
              Director 1,2Adam
      Mizel
              Director 1,2Marc
      Particelli
              Director 2
 1Member
of Audit Committee
 2Member
of Compensation Committee
 
 MANAGEMENT
AND DIRECTORS
 
 DR.
ROBERT PORTMAN,
age 63, currently serves as our Chief Executive Officer, Chief Scientific
Officer, and Chairman of the Board of Directors. He has served as Chief
Executive Officer since June 2005 and Chairman of the Board of Directors and
Chief Scientific Officer since September 2004. He served as President from June
2005 through the end of calendar year 2007. From our inception to September
2004, Dr. Portman served as our President, Chief Executive Officer, and Chairman
of the Board of Directors. Dr. Portman has a Ph.D. in Biochemistry and worked as
a senior scientist at Schering Laboratories before co-founding M.E.D.
Communications in 1974. In 1987, Dr. Portman started a consumer agency and, in
1993, he merged both agencies to form C&M Advertising with billings in
excess of $100 million. Dr. Portman is coauthor of two books, Nutrient Timing
and The Performance Zone. He has authored hundreds of articles on the role of
nutrition in improving sports performance. He is a frequent guest on TV and
radio and has been a keynote speaker at national coaches meetings on how
nutritional intervention during and after exercise can improve athletic
performance and speed muscle recovery. As Chief Scientific Officer of
PacificHealth Laboratories, he holds 12 patents for nutritional inventions to
improve sports performance as well as to control appetite and help in the
management of Type II diabetes.
 
 JASON
ASH,
age 33, has served as President, Chief Operating Officer, and a Director since
January 2008. Prior to joining the company, Mr. Ash worked internationally for
Cadbury Schweppes in broad commercial management and consumer marketing, most
recently as General Manager and Vice President of Cadbury Schweppes Americas
Beverages (“CSAB”) Sports, Energy & Water Category Unit. Mr. Ash has served
in various positions at Cadbury Schweppes both in theUSAandEuropesince
2002. During his tenure, Mr. Ash was responsible for the strategic development
and commercialization of the growing Sports Energy and Water pipeline of CSAB in
North America as well as a number of key business-changing roles in theUK,TurkeyandMiddle
East.
In addition to his considerable experience at Cadbury Schweppes, Mr. Ash has
also held Marketing and Finance positions at Masterfoods and Unilever and his
work has been nominated for a number of marketing industry
awards.
 
 STEPHEN
P. KUCHEN,
age 47, has served as our Chief Financial Officer, Treasurer, Secretary and a
Director, since September 2004. From September 2004 through the end of 2007, Mr.
Kuchen also served as our Chief Operating Officer. From June 2000 through
September 2004, Mr. Kuchen served as our Vice President - Finance, Chief
Financial Officer, Treasurer, Assistant Secretary and a Director. Mr. Kuchen
initially joined us in February of 2000 as Controller. Prior to joining us, Mr.
Kuchen was employed from 1996 to 1999 as the Controller of Able Laboratories, a
public company located inSouth
Plainfield,New
Jerseythat
manufactures and sells generic pharmaceuticals. Prior to his employment by Able
Laboratories, Mr. Kuchen was the Controller of Jerhel Plastics, a privately
owned manufacturer of women's compact cases from 1993 to 1996. Mr. Kuchen is a
graduate ofSetonHallUniversityinSouth
Orange,NJ,
and is a Certified Management
Accountant.
 
 DAVID
I. PORTMAN,
age 67, has served as a Director from our inception. Mr. Portman has a BS in
Pharmacy and an MBA. He worked as a sales representative and marketing manager
for Eli Lilly, Beecham-Massengill, Winthrop Laboratories and Sandoz
Pharmaceuticals before co-founding M.E.D. Communications in 1974. Currently, Mr.
Portman is President of TRIAD Development, a real estate Company that has
numerous commercial and rental properties inNew
Jersey.
 
 17
 MICHAEL
CAHR, age 68, was appointed to the Board of Directors in April 2002.
Since September 2004, Mr. Cahr has been a General Partner at Focus Equity
Partners, a private equity investment and management firm that acquires middle
market companies and assists them in reaching their performance
potential.  Prior to Focus, he was President of Saxony Consultants, a
company that provides financial and marketing expertise to organizations in the
United States and abroad. From February 2000 to March 2002, Mr. Cahr served as
President and Chief Executive Officer of Ikadega, Inc., a Northbrook, Illinois
server technology company developing products and services for the healthcare,
data storage and hospitality fields. Mr. Cahr was Chairman of Allscripts, Inc.,
the leading developer of hand-held devices that provide physicians with
real-time access to health, drug and other critical information from September
1997 through March 1999 and President, CEO and Chairman from June 1994 to
September 1997. Prior to Allscripts, Mr. Cahr was Venture Group Manager for
Allstate Venture Capital where he oversaw investments in technology, healthcare
services, biotech and medical services from October 1987 to June
1994.
  ADAM
MIZEL, age 38, was appointed to the Board of Directors in February 2007.
Since September 2005, Mr. Mizel has been the Managing Principal of the General
Partner of the Aquifer Opportunity Fund, L.P., an investment fund that takes a
private equity approach to investing in small capitalization public
companies.  Mr. Mizel previously was Managing Director and Chief
Operating Officer of Azimuth Trust, LLC., an alternative asset management firm
from 2001 until 2005.  Earlier, Mr. Mizel was a partner at Capital Z
Partners, L.P., a private equity and alternative investment firm, and Managing
Director at Zurich Centre Investments, Inc., the North American private equity
unit of Zurich Financial Services Group.  Mr. Mizel began his
investment career at Morgan Stanley Capital Partners in
1991.
 
 MARC
PARTICELLI, age 62, was appointed to the Board of Directors in February
2007. Since July 2006, Mr. Particelli has been Chairman of the Board of Coactive
Marketing Group (NASDAQ: CMKG), an integrated marketing communications agency.
Mr. Particelli served as interim President and Chief Executive Officer of
Coactive from July 2006 through October 2006. From August 2005 until March 2006,
Mr. Particelli was the Chief Executive Officer of TSM Corporation, a
telecommunications company serving the Hispanic market. Mr. Particelli was
Chairman of the Board, President and Chief Executive Officer of Modem Media, an
interactive marketing services firm, from January 1991 until its acquisition by
Digitas Inc. in October 2004. Earlier, Mr. Particelli was a partner at Oak Hill
Capital Management, a private equity investment firm, and managing director at
Odyssey Partners L.P., a hedge fund. Prior to entering the private equity
business, Mr. Particelli spent 20 years with Booz Allen where he helped create
the Marketing Industries Practice and led its expansion across Europe, Asia and
South America. Mr. Particelli also currently serves as a director of, and
investor in, several private companies and as an advisor to several private
equity firms.
 
 All
directors hold office until the next annual meeting of stockholders and until
their successors have been elected and qualified. Officers serve at the
discretion of the Board of Directors.
 
 9(b)         Scientific
Advisory Boards
 
 We
have established a Scientific Advisory Board to provide us with on-going advice
and counsel regarding research direction, product development, analysis of data,
and general counseling. As the need arises, we consult with individual members
of this board on a non-scheduled basis.
 
 9(c)         Family
Relationships
 
 Robert
Portman and David Portman are brothers. There are no other family relationships
among our directors, executive officers or persons nominated or chosen to become
directors or executive officers of ours.
 
 9(d)         Involvement
in Certain Legal Proceedings
 
 No
events have occurred during the past five years that are required to be
disclosed pursuant to Item 401(d) of Regulation S-B.
 
 CORPORATE
GOVERNANCE
 
 9(e)         Audit
Committee
 The Board of Directors has established a separately designated, standing Audit
Committee thatperforms the role described in section 3(a)(58)(A) of theExchange
Act.  During the fiscal year ended December 31, 2007, the Audit
Committee consisted of Michael Cahr and Adam Mizel.  Messrs. Cahr and
Mizel metthe criteria for independence set forth in Rule 10A-3(b)(1) of theExchange Act.
  18
  9(f)         Audit
Committee Financial Expert
 
 Michael Cahr, a member of
the Audit Committee of our Board of Directors, is the Audit Committee Financial
Expert, as that term is defined in Item 407 of Regulation S-B.  Mr.
Cahr is “independent” as that term is defined in Item 7(d)(3)(iv) of Schedule
14A under the Exchange Act.
 
 9(g)        Section
16(a) Beneficial Ownership Reporting
Compliance
 
 Section
16(a) of the Exchange Act requires that our directors and executive officers,
and any persons who own more than ten percent of our common stock, file with the
Securities and Exchange Commission, or SEC, initial reports of ownership and
reports of changes in ownership of our common stock and other equity securities.
Such persons are required by SEC regulations to furnish us with copies of all
such reports that they file. To our knowledge, based upon our review of these
reports, all Section 16 reports required to be filed by our directors, executive
officers and beneficial owners during the fiscal year ended December 31, 2007
were filed on a timely basis.
 
 9(i)         Code
of Ethics
 
 Our Board of
Directors has adopted a code of ethics, which applies to all our directors,
officers and employees. Our code of ethics is intended to comply with the
requirements of Item 406 of Regulation S-B.
 
 Our code of ethics
is posted on our Internet website at www.pacifichealthlabs.com.  We
will provide our code of ethics in print without charge to any stockholder who
makes a written request to:  Corporate Secretary, PacificHealth
Laboratories, Inc., 100 Matawan Road, Suite 420, Matawan,
NJ  07747.  Any waivers of the application and any
amendments to our code of ethics that applies to our principal executive
officer, principal financial officer, principal accounting officer or
controller, or persons performing similar functions must be made by our Board of
Directors. Any waivers of, and any amendments to, our code of ethics will be
disclosed promptly on our Internet website,
www.pacifichealthlabs.com.
 
 ITEM
10.                   EXECUTIVE
COMPENSATION
 
 The table below
sets forth information concerning compensation paid to Dr. Robert Portman and
Stephen Kuchen in 2007 and 2006. None of our executive officers other than Dr.
Portman and Mr. Kuchen received compensation of $100,000 or more in fiscal 2007
and 2006.  As set forth below, our compensation program for our named
executive officers consists of base salary and discretionary option
awards.
 
 
 Summary
Compensation Table
 
 Name
      and Principal
                Position
              Year
              Salary
                ($)
              Bonus
                ($)
              Stock
                Awards
                ($)
              Option
                Awards
                ($)
              Non-
                Equity
                Incentive
                Plan
                Compen-
                sation
                ($)
              Nonqualified
                Deferred
                Compensa-
                tion
      Earnings
                ($)
              All
      Other
                Compensa-
                tion
      ($)
              Total
      ($)(a)
              (b)
              (c)
              (d)
              (e)
              (f)
              (g)
              (h)
              (i)
              (j)Robert
      Portman,
                Chairman
      of the Board, Chief Executive Officer, President and Chief Scientific
      Officer
              2007
                2006
              $295,000
      (1)
                $275,000
      (1)
              __
                __
              __
                __
              $134,484
      (2)
                $103,282
      (2)
              __
                __
              __
                __
              $11,700
      (3)
                $0
      (4)
              $441,184
                $378,282
   19
   Stephen
      P. Kuchen,
                Chief
      Financial Officer, Chief Operating Officer, Treasurer, Secretary and
      Director
              2007
                2006
              $150,000
      (5)
                $137,500
      (5)
              $4,000
                $2,000
              __
                __
              $43,528
      (2)
                $32,451
      (2)
              __
                __
              __
                __
              $0
      (4)
                $0
      (4)
              $197,528
                $171,951
 
 (1)
Under the terms of his employment agreement in effect during 2006, Dr. Portman
received an annual base salary of $225,000 and received a payment of the accrued
amount $50,000 following the February 22, 2006 closing of our sale to Mott’s LLP
of patents, trademarks, web sites and other intellectual property related to our
ACCELERADE and ENDUROX sports nutrition product lines.  Effective as
of January 1, 2007, Dr. Portman’s annual base salary was increased to
$295,000.
 
 (2)
The amounts in column (f) reflect the dollar amount recognized for financial
statement reporting purposes for the fiscal year ended December 31, 2007, in
accordance with SFAS 123(R) of awards of stock options and thus include amounts
from awards granted in and prior to 2007. Assumptions used in the calculation of
this amount are included in Note A[10] of our audited financial statements for
the fiscal year ended December 31, 2007 included in Part II – Item
7,  Financial Statements of this Annual Report on Form 10-KSBand in Note A[10] of our audited financial statements for the year ended
December 31, 2006 included in our Annual Report on Form 10-KSB filed with the
SEC on March 13, 2007.
 
 (3)
Consists of an auto allowance.
 
 (4)
Perquisites and other personal benefits in the aggregate were less than
$10,000.
 
 (5)
Effective as of January 1, 2008, Mr. Kuchen’s base salary was increased to
$154,500.
 
 Employment
Agreements
 
 The annual base
salary reflected in the Summary Compensation Table for Dr. Portman is fixed in
his employment agreement, which is described below. We do not have a written or
unwritten employment agreement with Mr. Kuchen.  His annual base
salary is determined by our Compensation Committee and is adjusted
periodically.
 
 During 2006, we
employed Dr. Portman under an extension of his employment
agreement.  This agreement provided that Dr. Portman was entitled to
receive salary compensation of $275,000 per year, but that he would receive
$225,000 as an annual base salary until our financial condition significantly
improved.  When our financial condition improved, he would receive the
accrued difference of $50,000.   Following the closing of our
sale of intellectual property assets to Mott’s in February 2006, Dr. Portman
received $50,000 pursuant to this provision of the extension employment
agreement. In addition, the extension employment agreement provided that Dr.
Portman was entitled to an annual bonus not to exceed 100% of his base
salary.  Dr. Portman’s eligibility for, and the amount of, this bonus,
was to be based upon attainment of milestones by the company and/or Dr.
Portman.   No milestones for this bonus were established during
2007, and no bonus was paid in 2007.
 
 Under the extension employment agreement, Dr. Portman received options to
purchase up to 450,000 shares of our common stock not issued pursuant to any of
our Stock Option Plans but will be similar to those of our 2000 Incentive Stock
Option Plan. The exercise price of the options was set at $0.65 per share, which
was the prevailing market price of our common stock at September 1,
2004.  One-third of the options vested on September 1, 2004, one-third
on September 1, 2005, and the remaining one-third on September 1,
2006.
 
 Under the
extension employment agreement, Dr. Portman was also entitled to payments upon
his termination or upon a change-in-control of the company as described below
under the heading “Post-Termination or Change-In-Control
Payments.”  The term of the extension employment agreement terminated
on December 31, 2006.
  20
  On December 13, 2006, our Compensation Committee recommended,
and our full Board of Directors approved, the terms of a new employment
agreement with Dr. Portman, effective January 1, 2007.  Under the new
employment agreement, Dr. Portman receives a salary of $295,000 per year, as
well as a car allowance in theamount of
$975 per month.  In addition, Dr. Portman will be entitled to an
annual bonus not to exceed 100% of his base salary.  Dr. Portman’s
eligibility for, and the amount of, this bonus will be based upon attainment of
milestones by the company and/or Dr. Portman.  The milestones will be
agreed upon by Dr. Portman and our Compensation Committee.  No
milestones have been determined at this time.  The term of Dr.
Portman’s employment agreement will terminate on December 31, 2008, unless
terminated earlier by either Dr. Portman or the company.  Dr. Portman
has the right to terminate the employment agreement without cause on thirty
days’ prior written notice, or with cause.  The company also has the
right to terminate Dr. Portman’s employment agreement with or without cause. In
addition, if Dr. Portman’s employment is terminated by us without cause, or by
Dr. Portman for cause, any stock options granted to Dr. Portman, to the extent
not already vested, will vest.  Under the new employment agreement,
Dr. Portman also will be entitled to payments upon his termination or upon a
change-in-control of the company as described below under the heading
“Post-Termination or Change-In-Control Payments.”
 
 We entered into an
employment agreement with Mr. Ash with an initial term beginning January 3, 2008
and ending December 31, 2009.  The agreement automatically extends for
a one-year period unless either party gives the other party at least 120 days
written notice prior to the end of the initial term.  Thereafter, the
agreement will automatically extend for successive additional periods of one
year unless either party gives the other party at least 90 days written notice
prior to the end of the then current term.  Notice by either party of
a change in base salary, benefits or termination provisions of the agreement
will be deemed a notice of non-renewal.  In the event notice of
non-renewal is given, but Mr. Ash continues to be employed by us following the
expiration of a term, Mr. Ash’s base salary and benefits will continue to be
governed by the terms of the agreement, and either party may terminate the
agreement on not less than 90 days written notice to the other
party.
 
 Under his
employment agreement, Mr. Ash receives an initial annual base salary of
$295,000.  The amount of Mr. Ash’s annual base salary will be adjusted
with a market increase consistent with his position, company performance, and
Mr. Ash’s responsibilities, and such increase will be no less than the change in
the consumer price index for urban consumers in each year of renewal of his
employment agreement.  Mr. Ash is also entitled to receive annual
bonus compensation, beginning with calendar year 2008, not to exceed 100% of Mr.
Ash’s base salary, the eligibility for and amount of which shall be based upon
the attainment of certain milestones agreed upon by Mr. Ash and the Compensation
Committee of the Board of Directors. Mr. Ash is entitled to participate in all
benefit plans offered from time to time to our senior executives.  In
addition, we provide Mr. Ash with an all-inclusive relocation/travel/car stipend
of $55,000 for his first year of employment and $40,000 for the second year of
employment.  We also agreed to reimburse Mr. Ash for air travel to and
from the UK for one trip per month during the first six months of his employment
agreement up to a maximum of $2,500 per trip and to pay for all legal costs
associated with obtaining a visa and through green card for Mr. Ash and his
spouse.
 
 On November 28,
2007, the date Mr. Ash’s employment agreement was executed, and pursuant to Mr.
Ash’s employment agreement, the Board of Directors approved the issuance of
options to purchase 600,000 shares of our common stock (the “Options”) at an
exercise price of $0.65 per share, the closing price on the day of the Board’s
approval, to vest as follows: 150,000 shares on January 3, 2009, 150,000 shares
on January 3, 2010, 150,000 shares on January 3, 2011 and 150,000 shares on
January 3, 2012.  To the extent not previously exercised, the Options
will terminate upon the earlier of (i) January 3, 2013 or (ii) 90 days following
the termination of Mr. Ash’s employment with us.  The Options were not
issued pursuant to any of our Stock Option Plans but will be similar to those of
our 2000 Incentive Stock Option Plan.
 
 Equity
Awards in 2007
 
 During
2007, our Compensation Committee did not recommend any stock option or other
equity awards to our named executive officers.  On November 28, 2007,
the date Mr. Ash’s employment agreement was executed, and pursuant to Mr. Ash’s
employment agreement, the Board of Directors approved the issuance to him of
options to purchase 600,000 shares of the company’s common stock at an exercise
price of $0.65 per share, the closing price on the day of the Board’s approval,
to vest as follows: 150,000 shares on January 3, 2009, 150,000 shares on January
3, 2010, 150,000 shares on January 3, 2011 and 150,000 shares on January 3,
2012.  Mr. Ash’s employment with us became effective January 3, 2008,
thus he was not one of our named executive officers in 2007.
  21
  Outstanding
Equity Awards at Fiscal Year-End
 
 The following
table sets forth information with respect to the value of all unexercised
options previously awarded to the executive officers named above at the fiscal
year end, December 31, 2007.
 
 Option
      Awards
              Stock
      AwardsName
              Number
                of
                Securities
                Underlying
      Unexercised
                Options
                (#)
                Exercisable
              Number
      of
                Securities
                Underlying
      Unexercised
                Options
                (#)
                Unexercisable
              Equity
                Incentive
                Plan
      Awards:
                Number
      of
                Securities
      Underlying Unexercised Unearned
                Options
                (#)
              Option
                Exercise
      Price
                ($)
              Option
                Expiration
      Date
              Number
      of
                Shares
      or
                Units
      of
                Stock
      That
                Have
      Not
                Vested
                (#)
              Market
                Value
      of
                Shares
      or
                Units
      of
                Stock
      That
                Have
      Not
                Vested
                ($)
              Equity
                Incentive
      Plan
                Awards:
                Number
      of
                Unearned
                Shares,
      Units
                or
      Other Rights
                That
      Have Not
                Vested
                (#)
              Equity
                Incentive
      Plan
                Awards:
                Market
      or
                Payout
      Value
                of
      Unearned
                Shares,
      Units
                or
      Other Rights
                That
      Have Not
                Vested
                ($)(a)
              (b)
              (c)
              (d)
              (e)
              (f)
              (g)
              (h)
              (i)
              (j)Robert
      Portman,
                Chairman
      of the Board, Chief Executive Officer, and Chief Scientific
      Officer
              91,667
      (1)
                
                100,000
      (2)
                
                450,000
      (3)
              183,333
      (1)
                
                200,000
      (2)
                
                __
              __
                
                __
                
                __
              $1.13
                
                $0.60
                
                $0.65
              12/12/2011
                
                02/13/2011
                
                08/21/2009
              __
              __
              __
              __Stephen
      P. Kuchen,
                Chief
      Financial Officer, Chief Operating Officer, Treasurer, Secretary and
      Director
              16,667
      (1)
                
                33,333
      (2)
                
                120,000
      (4)
                
                20,000
      (5)
              33,333
      (1)
                
                66,667
      (2)
                
                __
                
                __
              __
                
                __
                
                __
                
                __
              $1.13
                
                $0.60
                
                $0.70
                
                $1.92
              12/12/2011
                
                02/13/2011
                
                10/01/2009
                
                03/06/2008
              __
              __
              __
              __
 
 
 (1) These
options vest in three equal annual installments beginning on December 13,
2007.
 
 (2) These
options vest in three equal annual installments beginning on February 13,
2007.
 
 (3) These
options vested in three equal annual installments beginning on September 1,
2004.
 
 (4) These
options vested in four equal annual installments beginning on October 1,
2004.
 
 (5) These
options vested in two equal annual installments beginning on March 6,
2004.
 
 Post-Termination
or Change-In-Control Payments
 
 Under his
employment agreement with us, Dr. Portman has the right to receive payments upon
his termination in certain circumstances and in the event of a change-in-control
of the company.  The terms relating to post-termination and
change-in-control payments in Dr. Portman’s new employment agreement that became
effective January 1, 2007 are identical to those in the extension employment
agreement that was effective during 2006.
  22
 If Dr. Portman's employment is terminated for any reason whatsoever (except by
us with cause), Dr. Portman will be entitled to receive a lump sum payment of an
amount equal to the base salary which would have been paid during the period
beginning on the date of termination of employment and ending on the earlier of
(1) the scheduled termination date, or (2) the first anniversary date of the
termination date.   Upon Dr. Portman's termination for any
reason, including his voluntary termination, Dr. Portman will not be bound by
any non-competition agreement unless we continue to pay his salary, in which
case he will be subject to a one-year non-competition agreement.  In
addition, if Dr. Portman’s employment is terminated by us without cause or by
Dr. Portman for cause, any stock options granted to Dr. Portman, to the extent
not already vested, will vest.
 
 In
the event of a change-in-control of the company, Dr. Portman will be entitled to
be paid, as additional compensation, a lump sum equal to his annual base salary
in effect immediately prior to the change-in-control, payable at closing or
completion of the change-in-control, or otherwise as required under Section 409A
of the Internal Revenue Code.  At the same time, all of his unvested
options will vest.   A change-in-control
means:
 
 •
              the
      acquisition of beneficial ownership, by any stockholder or group of
      stockholders, not including stockholders who are our officers or directors
      on the date of the employment agreement or any affiliate of such officer
      or director, of shares of our capital stock entitled to cast at least 50%
      of all votes which may be cast in the election of our directors,
      or
 
 •
              any
      sale of the company, including
 
 •
              any
      merger or consolidation involving the company if the stockholders of the
      company prior to the merger hold less than 50% of the shares of the
      combined entity after the merger,
or
 
 •
              the
      transfer or sale of all or substantially all of the assets of the
      company.
 
 If we terminate
Mr. Ash’s employment without cause or if Mr. Ash terminates his employment for
good reason, Mr. Ash will be entitled to receive twelve months base salary at
the then current rate, payable in accordance with our usual
practices.  In the event that Mr. Ash continues to receive any other
cash compensation from us following such termination or if Mr. Ash commences any
substantially full-time employment during such twelve-month period, the
remaining amount of severance pay due shall be reduced
dollar-for-dollar.
 
 If Mr.
Ash’s employment is terminated by us for any reason other than Mr. Ash’s death,
we, at our election, by notice to Mr. Ash given not later than ten days after
such termination, shall have the right to require Mr. Ash to agree to a
restrictive covenant prohibiting Mr. Ash from competing with us for a period of
one year.  As a condition to Mr. Ash’s observance of this restrictive
covenant, we will pay Mr. Ash twelve months base salary at the then current
rate, payable in accordance with our usual practices.  Such payment
shall be in lieu of, rather than in addition to, any other severance payments,
other than the Change in Control Payment, due under the employment
agreement.  In addition, in the event that Mr. Ash receives
compensation from any other substantially full-time employment, we shall have
the option to continue such payments in full without any dollar-for-dollar
reduction.
 
 In the
event of a “change in control and a contemporaneous or subsequent termination of
employment by Mr. Ash for Good Reason or termination by us without cause, Mr.
Ash will be paid, in addition to any other severance payments due to Mr. Ash, a
lump sum equal to half his annual base salary in effect immediately prior to the
change in control.  In addition, upon such a termination, all unvested
stock options held by Mr. Ash will immediately become accelerated and
vested.  Any payment due in the event of a Change in Control will be
paid upon the completion of the Change in Control
 
 Under our
arrangement with Mr. Kuchen, in the event of a sale, merger or change in control
of the company, Mr. Kuchen will receive one-half of his annual salary and all of
his options would become immediately vested.  If Mr. Kuchen were
subsequently terminated, Mr. Kuchen would receive one-half of his annual salary
as severance.
 
 DIRECTOR
COMPENSATION
 
 In the
past, we have compensated our non-employee Directors with awards of options to
purchase shares of our common stock at an exercise price equal to the closing
trading price of our common stock on the Over-the-Counter Bulletin Board on the
date of grant. On occasions, we have also used the closing price on the date
prior to grant.
  23
  Dr. Robert
Portman, our Chairman of the Board, Chief Executive Officer, and Chief
Scientific Officer, and Stephen Kuchen, our Chief Financial Officer, Treasurer
and Secretary, receive no compensation for their services as Directors because
they are employees of the company. The compensation received by Dr. Portman and
Mr. Kuchen as employees of the company is shown in the Summary Compensation
Table on page 21.
 
 On
February 16, 2007, our Board of Directors increased the size of our Board from
four to six members and appointed Mr. Mizel and Mr. Particeclli to fill the two
new vacancies.  On the same day, the Board approved the issuance to
each of Mr. Mizel and Mr. Particelli of options to purchase 10,000 shares of the
company’s common stock at an exercise price of $2.14 per share, the closing
price on the date prior to the Board's approval, to vest over one year beginning
February 16, 2007. These options were issued pursuant to the terms and
conditions of the company’s 2000 Incentive Stock Option Plan.
 
 Director
Compensation Table
 
 The table below
summarizes the compensation that we paid to non-employee Directors for the
fiscal year ended December 31, 2007.
 
 Name
              Fees
      Earned or
                Paid
      in
                Cash
                ($)
              Stock
                Awards
                ($)
              Option
                Awards
                ($)
              Non-Equity
                Incentive
      Plan
                Compensation
                ($)
              Nonqualified
                Deferred
                Compensation
                Earnings
                ($)
              All
      Other
                Compensation
                ($)
              Total
                ($)(a)
              (b)
              (c)
              (d)
              (e)
              (f)
              (g)
              (h)David
      I. Portman
              __
              __
              $19,214
      (1)
              __
              __
              __
              $19,214Michael
      Cahr
              __
              __
              $19,214
      (1)
              __
              __
              __
              $19,214Adam
      Mizel
              __
              __
              $25,561
      (1)
              __
              __
              __
              $25,561Marc
      Particelli
              __
              __
              $25,561
      (1)
              __
              __
              __
              $25,561
 
 
 (1) The
amounts in column (d) reflect the dollar amount recognized for financial
statement reporting purposes for the fiscal year ended December 31, 2007, in
accordance with SFAS 123(R) of awards of stock options and thus include amounts
from awards granted in and prior to 2007. Assumptions used in the calculation of
this amount are included in Note A[10] of our audited financial statements for
the fiscal year ended December 31, 2007 included in Part
II – Item 7. Financial Statements of this Annual Report on Form 10-KSB
and in Note A[10] of our audited financial statements for the year ended
December 31, 2006 included in our Annual Report on Form 10-KSB filed with the
SEC on March 13, 2007.  As of December 31, 2007, each Director had the
following number of options outstanding:  David I. Portman – 115,000;
Michael Cahr – 60,000; Adam Mizel – 40,000; Marc Particelli –
40,000.
 
 
 ITEM
11.SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
 
 As of March 5, 2008, we
had 13,501,426shares of common stock outstanding. The following table sets forth information
concerning the present ownership of our common stock by our directors, executive
officers and each person known to us to be the beneficial owner of more than
five percent of the outstanding shares of our common
stock.
  24
  
 Name
      and Address (1)
              Common
      Stock (2)
                Amount
      Beneficially Owned
              Common
      Stock (2)
                Percentage
      of ClassRobert
      Portman (3)
                Chairman
      of the Board, Chief
                Executive
      Officer, Chief Scientific Officer
              3,122,718
              21.7%Jason
      Ash
                President,
      Chief Operating Officer
                and
      a Director
              -0-
              *Stephen
      P. Kuchen (4)
                Vice
      President, Chief Financial
                Officer
      and a Director
              249,378
              1.8%David
      I. Portman (5)
                Secretary
      and a Director
              533,928
              3.9%Michael
      Cahr (6)
                Director
              247,500
              1.8%Adam
      Mizel (7)
                Director
              467,780
              3.5%Marc
      Particelli (8)
                Director
              99,054
              *Executive
      Officers and Directors as
                a
      group (7 persons)
              4,720,358
              31.3%Matthew
      Smith (9)
                241 Central Park West
                New York, NY 10024
              953,862
              6.8%Diker
      Management, LLC (10)
                745 Fifth Ave., Suite 1409
                New York, NY 10151
              1,123,518
              8.3%
 
  *
                  Less
      than one
percent
 (1)
                Except as otherwise
      indicated, the address of each person named in the above table is c/o
      PacificHealth Laboratories, Inc., 100
      Matawan Road, Suite 420,Matawan,NJ07747.
  (2)
              Common
      Stock which is issuable upon the exercise of a stock option which is
      presently exercisable or which becomes exercisable within sixty days is
      considered outstanding for the purpose of computing the percentage
      ownership (x) of persons holding such options, and (y) of officers and
      directors as a group with respect to all options held by officers and
      directors.
 
 (3)
              Includes
      741,667 shares issuable upon the exercise of options not under any
      Incentive Stock plan (“NON-ISO”); and 160,428 shares issuable upon the
      exercise of warrants issued pursuant to a 2003 Private Placement. Does not
      include 200,000 shares of Common Stock owned by Jennifer Portman, Dr.
      Portman's wife, individually and as Trustee for his and her minor
      children, as to which Dr. Portman disclaims beneficial
      ownership.
  25
  (4)
              Includes
      103,334 shares issuable upon the exercise of options granted under our
      1995 Plan; 120,000 shares issuable upon the exercise of options granted
      not covered under any Plan (“NON-ISO”) and 5,348 shares issuable upon the
      exercise of warrants issued pursuant to a 2003 Private
      Placement.
 
 (5)
              Includes
      60,000 shares issuable upon the exercise of options granted under our 1995
      Plan; 15,000 shares issuable upon the exercise of options granted under
      our 2000 Plan; and 53,476 shares issuable upon the exercise of warrants
      granted pursuant to a 2003 Private
  Placement.
 
 (6)
                Includes
      20,000 shares issuable upon the exercise of options granted under our 1995
      Plan.
 
 (7)
              Includes
      447,780 shares that are owned by Acquifer Opportunity Fund, L.P., of which
      Mr. Mizel is the managing principal of the general partner and 20,000
      shares issuable upon the exercise of options granted under our 2000
      Plan.  Mr. Mizel disclaims beneficial ownership of the shares
      owned by Acquifer Opportunity Fund, L.P. except to the extent of his
      pecuniary interest therein.
 
 (8)
                Includes
      20,000 shares issuable upon the exercise of options granted under our 2000
      Plan.
 
 (9)
              Includes
      318,048 shares issuable upon the exercise of warrants granted pursuant to
      a 2003 Private Placement and 127,500 shares issuable upon the exercise of
      warrants granted pursuant to consulting services pursuant to a 2003
      Private Placement.
 
 (10)
              As
      reported in an amendment to Schedule 13G filed with the SEC on February
      12, 2008, Diker GP, LLC, a Delaware limited liability company ("Diker
      GP"), is the general partner of the Diker Value Tech Fund, LP, Diker Value
      Tech QP Fund, LP, Diker Micro-Value Fund, LP, the Diker Micro-Value QP
      Fund, LP, Diker Micro & Small Cap Fund LP, and Diker M&S Cap
      Master Ltd, each of which is a Delaware limited partnership (collectively,
      the “Diker Funds”).  As the sole general partner of the Diker
      Funds, Diker GP, has the power to vote and dispose of the shares of our
      common stock owned by the Diker Funds and, accordingly, may be deemed the
      beneficial owner of such shares. Pursuant to investment advisory
      agreements, Diker Management, LLC, aDelawarelimited
      liability company ("Diker Management"), serves as the investment manager
      of the Diker Funds. Accordingly, Diker Management may be deemed the
      beneficial owner of shares held by the Diker Funds. Charles M. Diker and
      Mark N. Diker are the managing members of each of Diker GP and Diker
      Management, and in that capacity direct their operations. Therefore,
      Charles M. Diker and Mark N. Diker may be beneficial owners of shares
      beneficially owned by Diker GP and Diker Management. Diker GP, Diker
      Management, Charles M. Diker and Mark N. Diker disclaim all beneficial
      ownership as affiliates of a Registered Investment Adviser, and in any
      case disclaim beneficial ownership except to the extent of their pecuniary
      interest in the
  shares.
 
 Securities
Authorized For Issuance Under Equity Compensation Plans
 
 The following
table sets forth information as of the end of 2007 regarding our existing
compensation plans and individual compensation arrangements pursuant to which
our equity securities are authorized for issuance to employees or non-employees
(such as directors, consultants and advisors) in exchange for consideration in
the form of services:
 
 
 26
 
  Plan
      Category
              Number
      of securities to be
                issued
      upon exercise of
                outstanding
      options,
                warrants
      and rights
              Weighted-average
      exercise
                price
      of outstanding
                options,
      warrants and rights
              Number
      of securities
                remaining
      available for
                future
      issuance under
                equity
      compensation plans
                (excluding
      securities
                reflected
      in column (a))(a)
              (b)
              (c)Equity
      compensation plans
                approved
      by security
                holders
              663,750
              $0.88
              375,250Equity
      compensation plans
                not
      approved by security
                holders
              1,745,000
              $0.72
              N/ATotal
              2,408,750
              $0.76
              375,250
 
 Pursuant to the
terms of Dr. Portman’s and Mr. Ash’s employment agreements with us and pursuant
to Mr. Kuchen’s arrangement with us, each of our named executive officers hold
some options to purchase shares of our common stock that have not been approved
by our stockholders.  Specifically, Dr. Portman holds options to
purchase an aggregate of 1,025,000 shares of our common stock, Mr. Ash holds
options to purchase 600,000 shares of our common stock, and Mr. Kuchen holds
options to purchase 120,000 shares of our common stock that have not been
approved by our shareholders. The terms of the non-qualified options granted to
Dr. Portman and Mr. Ash are similar to those of our 2000 Incentive Stock Option
Plan.  The terms of the non-qualified options granted to Mr. Kuchen
are similar to those of our 1995 Incentive Stock Plan.  The material
terms of the 1995 Incentive Stock Plan and the 2000 Incentive Stock Option Plan
are described in Note H to our audited financial statements for the fiscal year
ended December 31, 2007 included in “Part II – Item 7, Financial Statements” of
this Annual Report on Form 10-KSB.  For information about the vesting
schedule and exercise prices of these options, see the footnotes in the above
table captioned “Outstanding Equity Awards at Fiscal Year-End” and the
description under “Equity Awards in 2007” under “Item 10, Executive
Compensation” above.
 
 ITEM
12.CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
 
 Related
Transactions
 
 During
the last two fiscal years, we have not entered into any material transactions or
series of transactions which, in the aggregate, would be considered material in
which any officer, director or beneficial owner of 5% or more of any class of
our capital stock, or any immediate family member of any of the preceding
persons, had a direct or indirect material interest, nor are any such
transactions presently proposed, except as follows:
 
 (a)             
On February 22, 2006, we sold to Mott's LLP the patents, trademarks, web sites
and other intellectual property related to our ACCELERADE® and ENDUROX® sports
nutrition product lines, and we entered into a license agreement with Mott’s
that gives us the exclusive, royalty free right to continue to sell these
products in powder, gel and pill form.  In connection with these
transactions, Dr. Robert Portman, our Chairman, CEO, President and Chief
Scientific Officer, entered into a Consulting, License and Non-Competition
Agreement for a period ending on the later of the second anniversary of launch
of a product by Mott's or February 22, 2009.  Under the consulting
agreement, Dr. Portman will consult with Mott's with respect to research,
development, enhancement, testing, marketing and sale of products related to the
transferred intellectual property.  Dr. Portman will not receive any
compensation for these services, other than for personal appearances at certain
speaking engagements and media opportunities.  Dr. Portman is
significantly limited in his ability to engage in the research, development,
testing, marketing, sale or distribution of sports drinks, except with respect
to our activities under the License Agreement or on behalf of
Mott's.  Under the consulting agreement, Dr. Portman has licensed, for
no additional compensation, the non-exclusive right to use his name, in
connection with the packaging, marketing and sale of any products by Mott's
under the ACCELERADE and ENDUROX brands.  In the license agreement
between the company and Mott’s, we granted Mott's similar rights to use the
company's name. The breach of certain covenants by Dr. Portman in the consulting
agreement may give Mott's the right to terminate the company's rights under the
license agreement or the royalty payments under the asset purchase
agreement.
 
 27
 (b)             
Effective January 5, 2007, we terminated the amended and restated Investors
Rights Agreement that we initially entered in with Hormel Health Labs LLC on
January 28, 2005.  The other party to this transaction was Diamond
Crystal Sales, LLC, which acted in its capacity as successor to Hormel following
Hormel’s merger with and into Diamond effective October 31,
2006.   In addition, effective as of January 5, 2007, we, Diamond
and Dr. Robert Portman terminated the Right of First Refusal and Co-Sale
Agreement into which we, Hormel and Dr. Portman had previously entered on
January 28, 2005.  The termination of the Investors Rights Agreement
and the Co-Sale Agreement occurred in connection with Diamond’s sale of the
909,091 shares of our common shares previously held by Hormel in a private
transaction to certain purchasers effective January 5,
2007.   Hormel had acquired the 909,091 shares of our common
stock upon its conversion of the 90,909 shares of our Series A Convertible
Preferred Stock that it purchased pursuant to the Series A Preferred Stock
Purchase Agreement on January 28, 2005. Upon the closing of Diamond’s sale of
the common stock, the Investor Rights Agreement and the Co-Sale Agreement, and
all rights, duties, obligations and liabilities of the parties under the
agreements, terminated.  This included termination of any liability
for breach or non-fulfillment of either agreement prior to the sale of the
common stock.  The purchasers of the shares of common stock sold by
Diamond included Dr. Robert Portman and our Directors, David Portman and Michael
Cahr, each of whom purchased 100,000 shares at $0.95 per share. Messrs. The
purchasers also included the Aquifer Opportunity Fund of which Adam Mizel is the
Managing Principal. At the time of the transaction, Mr. Mizel was not yet one of
our Directors.
 
 (c)             
On February 16, 2007, our Board of Directors approved the sale of an aggregate
of 243,243 shares of our common stock to newly appointed Director Mr. Particelli
and Aquifer Opportunity Fund, L.P., of which Mr. Mizel, is the Managing
Principal of the General Partner, for an aggregate purchase price of $450,000.
The purchase price of $1.85 per share was based on the 10-day average closing
price as of February 15, 2007. The shares were issued pursuant to the terms and
conditions of a Stock Purchase Agreement, dated February 22, 2007 entered into
by the company with Aquifer Opportunity Fund, L.P. and Mr. Particelli. Pursuant
to the terms of the Purchase Agreement, the holders of the Shares are entitled
to piggyback registration rights and demand registration rights in the event Mr.
Mizel is no longer a Director.  Under the Purchase Agreement, Mr.
Particelli acquired 54,054 shares for $100,000 and Aquifer Opportunity Fund L.P.
acquired 189,189 for $350,000.
 
 Director
Independence
 
 During 2007, the
following members of our Board of Directors were independent under the relevant
Marketplace Rules of The NASDAQ Stock Market LLC:  Michael Cahr, Adam
Mizel, and Marc Particelli.  During 2007, Mr. Cahr served on the Audit
Committee, the Compensation Committee and the Nominating
Committee.  During 2007, Mr. Mizel served on the Audit Committee and
the Compensation Committee. During 2007, Mr. Particelli served on the
Compensation Committee. Messrs. Cahr, Mizel, and Particelli satisfied the
criteria set forth under the Marketplace Rules of The NASDAQ Stock Market LLC
relating to the independence standards for members of the Audit
Committee.  The Board of Directors did not consider any transaction,
relationship or arrangement not otherwise disclosed above in this Item
12 under the heading Related
Transactions in determining the independence of Messrs. Cahr, Mizel, or
Particelli.
 
 ITEM
13.EXHIBITS
 
 (a)           A
list of the exhibits filed as a part of this report is set forth in the Exhibit
Index starting after page 30 hereof.
 
 ITEM
14.                  PRINCIPAL
ACCOUNTANTS’ FEES AND SERVICES
 
 Weiser
LLP served as our independent auditors for the years ended December 31, 2007 and
December 31, 2006. We have been billed the fees set forth below in connection
with services rendered by the independent auditors to us:
  Fee
      Category
                
                Fiscal
      2007
                
                
                Fiscal
      2006Audit
      Fees1
                
                $
                90,463
                
                
                $
                109,575Audit-Related
      Fees2
                
                $
                - 0
      -
                
                
                $
                - 0
      -Tax Fees3
                
                $
                10,105
                
                
                $
                6,500All Other Fees4
                
                $
                5,000
                
                
                $
                16,500TOTAL
                
                $
                105,568
                
                
                $
                132,575
   28
  1Audit
fees consisted of fees for the audit of our annual financial statements and
review of quarterly financial statements as well as services normally provided
in connection with statutory and regulatory filings or engagements, comfort
letters, consents and assistance with and review of company documents filed with
the SEC.
 
 2Audit-related
fees consisted of fees for assurance and related services, including primarily
employee benefit plan audits, due diligence related to acquisitions, accounting
consultations in connection with acquisitions, consultation concerning financial
accounting and reporting standards and consultation concerning matters related
to Section 404 of the Sarbanes Oxley Act of
2002.
 
 3Tax
fees consisted primarily of fees for tax compliance, tax advice and tax planning
services.
 
 4Other
fees consisted of prior auditors consents in conjunction with 1933 Act
filings.
 
 Policy
for Pre-Approval of Audit and Non-Audit Services
 
 The
Audit Committee's policy is to pre-approve all audit services and all non-audit
services that our independent auditor is permitted to perform for us under
applicable federal securities regulations. As permitted by the applicable
regulations, the Audit Committee's policy utilizes a combination of specific
pre-approval on a case-by-case basis of individual engagements of the
independent auditor and general pre-approval of certain categories of
engagements up to predetermined dollar thresholds that are reviewed annually by
the Audit Committee. Specific pre-approval is mandatory for the annual financial
statement audit engagement, among others.
 
 The pre-approval policy
was implemented effective as of March 16, 2004.All engagements of the independent auditor to perform any audit services and
non-audit services since that date have been pre-approved by the Audit Committee
in accordance with the pre-approval policy. The policy has not been waived in
any instance. All engagements of the independent auditor to perform any audit
services and non-audit services prior to the date the pre-approval policy was
implemented were approved by the Audit Committee in accordance with its normal
functions.
 
 SUPPLEMENTAL
INFORMATION
 
 We have
not sent an annual report or proxy statement to security holders in respect of
the fiscal year ending December 31, 2007.  Such report and proxy
statement will be furnished to security holders in connection with our Annual
Meeting scheduled to be held in the second quarter of 2008. Copies of such
material will be furnished to the Commission when it is sent to security
holders.
  
 SIGNATURES
 
 In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
 
 PacificHealth
      Laboratories, Inc.By: /s/
      Robert
      PortmanRobert Portman,
      President
      and Chief Executive OfficerDate: March
      5, 2008
   29
 In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dated indicated.
 
 /s/
      Robert
      Portman
                Chairman
      of the Board and Chief
                March
      5, 2008Robert
      Portman
                Executive
      Officer (Principal ExecutiveOfficer)/s/
      Stephen P.
      Kuchen
                Director,
      Principal
                March
      5, 2008Stephen
      P. Kuchen
                Financial
      and AccountingOfficer,
      Secretary/s/
      David I.
      Portman
                Director
                March
      5, 2008David
      I. Portman/s/
      Michael
      Cahr
                Director
                March
      5, 2008Michael
      Cahr/s/
      Adam
      Mizel
                Director
                March
      5, 2008Adam
      Mizel/s/
      Marc
      Particelli
                Director
                March
      5, 2008Marc
      Particelli
 
 30
 
 EXHIBIT
INDEX
 Exhibit
      No.
                
                
                
                Description
                
                Incorporated
                  by
      Reference3.1
                
                --
                
                Certificate
      of Incorporation of PacificHealth Laboratories, Inc.
                  and
      all amendments thereto
                
                A3.2
                
                --
                
                Amended
      and Restated Bylaws of PacificHealth
                  Laboratories,
      Inc.
                
                C3.3
                
                --
                
                Certificate
      of Amendment of Certificate of
                  Incorporation
      of PacificHealth Laboratories, Inc.
                
                H3.4
                
                --
                
                Certificate
      of Designations For Series A Preferred Stock
                
                I4.1
                
                --
                
                Specimen
      Common Stock Certificate
                
                C4.2
                
                --
                
                Stock
      Purchase Agreement dated June 1, 2001
                  between
      Pacific Health Laboratories, Inc. and
                  Glaxo
      Wellcome International B.V.
                
                E10.1†
                
                --
                
                Incentive
      Stock Option Plan of 1995
                
                A10.2
                
                --
                
                StrategicAllianceAgreement
      between the Company
                  and
      theInstituteofNutritionand
      Food Hygiene
                
                A10.3
                
                --
                
                Exclusive
      Licensing Agreement between the
                  Company
      and the INFH
                
                A10.4
                
                --
                
                Shareholders
      Agreement
                
                A10.5†
                
                --
                
                2000
      Incentive Stock Option Plan
                
                D10.6†
                
                
                
                Employment
      Extension Agreement between PacificHealth
                  Laboratories,
      Inc. and Robert Portman effective
                  September
      1, 2004, executed February 28, 2006
                
                J10.8
                
                
                
                Asset
      Purchase Agreement dated February 22, 2006
                  between
      PacificHealth Laboratories, Inc. and Mott’s
                  LLP
      (redacted, subject to request for confidential
      treatment)
                
                L10.9
                
                
                
                License
      Agreement dated February 22, 2006
                  between
      PacificHealth Laboratories, Inc. and Mott’s
                  LLP
      (redacted, subject to request for confidential
      treatment)
                
                L10.10
                
                
                
                Consulting,
      License and Noncompetition Agreement dated
                  February
      22, 2006 among PacificHealth Laboratories, Inc.,
                  Mott’s
      LLP, and Robert Portman (redacted, subject to
                  request
      for confidential treatment)
                
                L10.11†
                
                
                
                Option
      Certificate for grant to Robert Portman
                
                M10.12†
                
                
                
                Option
      Certificate for grant to Stephen Kuchen under
                  the
      PacificHealth Laboratories, Inc. 1995 Incentive Stock
                  Option
      Plan.
                
                M
  31
  10.13
                
                
                
                Form
      of Stock Purchase Agreement entered into among
                  the
      Company, AquiferOpportunityFund,
      L.P.
                  and
      Marc C. Particelli.
                
                N10.14
                
                
                
                Form
      of Grant Instrument under PacificHealth
                  Laboratories,
      Inc. 2000 Incentive Stock Option Plan
                  for
      Adam M. Mizel.
                
                N10.15
                
                
                
                Form
      of Grant Instrument under PacificHealth
                  Laboratories,
      Inc. 2000 Incentive Stock Option Plan
                  for
      Marc C. Particelli
                
                N10.16
                
                
                
                Employment
      Agreement, effective January 3, 2008,
                  by
      and between PacificHealth Laboratories, Inc. and
                  Jason
      Ash
                
                O10.17†
                
                
                
                Summary
      of Compensation for Executive Officers
                  of
      PacificHealth Laboratories, Inc.
                
                *23.1
                
                
                
                Consent
      of Weiser LLP
                
                *31.1
                
                
                
                Rule
      13a-14(a) Certification of Chief Executive Officer.
                
                *31.2
                
                
                
                Rule
      13a-14(a) Certification of Chief Financial Officer.
                
                *32
                
                
                
                Certifications
      of Chief Executive Officer and
                  Chief
      Financial Officer pursuant to Section 906
                  of
      the Sarbanes-Oxley Act of 2002
                
                *
 _______________________
 *
                Filed
      herewith
  †
              Management
      contract or management compensatory plan or
      arrangement.
 
 A
              Filed
      with Registration Statement on Form SB-2 (Registration No. 333-36379) (the
      “1997 SB-2”) on September 25,
1997.
 
 B
                Filed
      with Amendment No. 1 to the 1997 SB-2 on October 23,
      1997.
 
 C
              Filed
      with Amendment No. 3 to the 1997 SB-2 on December 17,
  1997.
 
 D
              Filed
      with Definitive Proxy Statement (Schedule 14A) for annual meeting held on
      August 16, 2000, filed on July 11,
2000.
 
 E
              Filed
      with Current Report on Form 8-K dated June 1, 2001, filed on
      June 14, 2001.
 
 F
              Filed
      with Annual Report on Form 10-KSB for the year ended December 31,
      2001.
 
 G
              Filed
      with Amendment to Current Report on Form 8-K dated June 1, 2001,
      filed July 5, 2001.
 
 H
              Filed
      with Annual Report on Form 10-KSB for the year ended December 31,
      2002.
 
 I
              Filed
      as Exhibit 3.1 to Current Report on Form 8-K, dated January 24, 2005,
      filed on January 28, 2005.
   32
  J
              Filed
      as Exhibit 10.1 to Current Report on Form 8-K, dated and filed on
      September 9, 2004.
 
 K
              Filed
      with Annual Report on Form 10-KSB for the year ended December 31,
      2004.
 
 L
              Filed
      with Annual Report on Form 10-KSB for the year ended December 31,
      2005.
 
 M
              Filed
      as Exhibit to Current Report on Form 8-K, dated December 13, 2006 and
      filed on December 19,2006.
 
 N
              Filed
      as Exhibit to Current Report on Form 8-K, dated February 22, 2007 and
      filed February 27, 2007.
 
 O
              Filed
      as Exhibit to Current Report on Form 8-K, dated November 28, 2007 and
      filed December 3, 2007.
 
 Note:  In
the case of incorporation by reference to documents filed by the Registrant
under the Exchange Act, the Registrant’s file number under the Exchange Act is
0-23495.


33


PACIFICHEALTH
LABORATORIES, INC.
  FINANCIAL
STATEMENTS
  DECEMBER
31, 2007 and 2006
  
  PACIFICHEALTH
LABORATORIES, INC.
  Contents
  PageFinancial
      StatementsReport
      of independent registered public accounting firm
                F-1Balance
      sheets as of December 31, 2007 and 2006
                F-2Statements
      of operations for the years ended December 31, 2007 and
      2006
                F-3Statements
      of changes in stockholders’ equity for the years ended December 31, 2007
      and 2006
                F-4Statements
      of cash flows for the years ended December 31, 2007 and
      2006
                F-5Notes
      to financial statements
                F-6
  
  REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
    To the
Board of Directors and
 Stockholders
of PacificHealth Laboratories, Inc.
   We have
audited the accompanying balance sheets of PacificHealth Laboratories, Inc. as
of December 31, 2007 and 2006 and the related statements of operations, changes
in stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
  We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement.  An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation.  We believe that our audits provide a reasonable basis
for our opinion.
  In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of PacificHealth Laboratories, Inc. as
of December 31, 2007 and 2006, and the results of its operations and its cash
flows for the years then ended in conformity with U.S. generally accepted
accounting principles.
       Weiser
LLP
 New York,
New York
 March 5,
2008
   F-1
  PACIFICHEALTH
LABORATORIES, INC.
 Balance
Sheets
  December
      31,2007
              
              
              2006ASSETSCurrent
      assets:Cash and cash
      equivalents
              
              $
              1,712,713
              
              
              $
              2,564,038Accounts receivable,
      net of allowances of $20,000 and $31,000,
    respectively
              
              
              709,623
              
              
              
              502,234Inventories
      (including consigned inventory of approximately $261,000
      and
                $97,000,
      respectively)
              
              
              2,010,446
              
              
              
              1,913,275Prepaid
      expenses
              
              
              111,672
              
              
              
              144,059Total current
      assets
              
              
              4,544,454
              
              
              
              5,123,606Property
      and equipment, net
              
              
              185,007
              
              
              
              74,163Deposits
              
              
              10,895
              
              
              
              10,895TOTAL
      ASSETS
              
              $
              4,740,356
              
              
              $
              5,208,664LIABILITIESCurrent
      liabilities:Notes
      payable
              
              $
              16,205
              
              
              $
              44,327Accounts payable and
      accrued expenses
              
              
              472,475
              
              
              
              960,757Deferred
      revenue
              
              
              559,876
              
              
              
              244,1971,048,556
              
              
              
              1,249,281CommitmentsSTOCKHOLDERS'
      EQUITYPreferred
      stock, no par value; 1,000,000 shares authorized,
                -0-
      shares issued and outstanding at December 31, 2007
                and
      December 31, 2006
                Common
      stock, $0.0025 par value, authorized 50,000,000 shares;
              
              
              -
              
              
              
              -issued and
      outstanding 13,501,426 shares at December 31, 2007
    and12,776,690 shares at
      December 31, 2006
              
              
              33,754
              
              
              
              31,942Additional
      paid-in capital
              
              
              18,874,609
              
              
              
              17,867,945Accumulated
      deficit
              
              
              (15,216,563
              )
              
              
              (13,940,504
              )3,691,800
              
              
              
              3,959,383TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
              
              $
              4,740,356
              
              
              $
              5,208,664
  See
notes to financial statements
  F-2
 PACIFICHEALTH
LABORATORIES, INC.
 Statements
of Operations
  Years
      EndedDecember
      31,2007
              
              
              2006Revenue:Net product
      sales
              
              $
              7,427,857
              
              
              $
              6,209,846Cost
      of goods sold:Product
      sales
              
              
              4,445,978
              
              
              
              3,472,955Write-down of
      inventories
              
              
              439,208
              
              
              
              -4,885,186
              
              
              
              3,472,955Gross
      profit
              
              
              2,542,671
              
              
              
              2,736,891Operating
      expenses:Selling, general and
      administrative
              
              
              3,595,960
              
              
              
              2,917,450Research and
      development
              
              
              211,078
              
              
              
              196,020Depreciation
              
              
              96,374
              
              
              
              50,9053,903,412
              
              
              
              3,164,375Loss
      before other income (expense) and provision for income
    taxes
              
              
              (1,360,741
              )
              
              
              (427,484
              )Other
      income (expense):Gain
      on sale of patents/technology, net of expenses of $90,795
              
              
              -
              
              
              
              3,909,205Interest
      income
              
              
              71,734
              
              
              
              96,697Interest
      expense
              
              
              (3,496
              )
              
              
              (31,416
              )Other
      income
              
              
              16,444
              
              
              
              -84,682
              
              
              
              3,974,486(Loss)
      income before income taxes
              
              
              (1,276,059
              )
              
              
              3,547,002Provision
      for income taxes
              
              
              -
              
              
              
              1,278,000Net
      (loss) income
              
              
              (1,276,059
              )
              
              
              2,269,002Less
      preferred dividends
              
              
              -
              
              
              
              (10,425
              )Net
      (loss) income applicable to common stockholders
              
              $
              (1,276,059
              )
              
              $
              2,258,577Net
      (loss) income per common share - basic
              
              $
              (0.10
              )
              
              $
              0.19Net
      (loss) income per common share - diluted
              
              $
              (0.10
              )
              
              $
              0.17Weighted
      average shares outstanding - basic
              
              
              13,313,995
              
              
              
              11,906,777Weighted
      average shares outstanding – diluted
              
              
              13,313,995
              
              
              
              13,397,154
  See
notes to financial statements
  F-3
  PACIFICHEALTH
LABORATORIES, INC.
  Statements
of Changes in Stockholders' Equity
 Years
Ended December 31, 2007 and 2006
  Preferred
      Stock
              
              
              Common
      Stock
              
              
              Additional
                  Paid
      In
              
              
              AccumulatedShares
              
              
              Amount
              
              
              Shares
              
              
              Amount
              
              
              Capital
              
              
              Deficit
              
              
              TotalBalance,
      January 1, 2006
              
              
              90,909
              
              
              $
              966,387
              
              
              
              10,267,045
              
              
              $
              25,667
              
              
              $
              15,790,335
              
              
              $
              (16,209,506
              )
              
              $
              572,883Fair
      value of stock options issued
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              189,880
              
              
              
              
              
              
              
              189,880Preferred
      stock converted into common stock
              
              
              (90,909
              )
              
              
              (966,387
              )
              
              
              909,091
              
              
              
              2,273
              
              
              
              964,114
              
              
              
              
              
              
              
              -Stock
      options/warrants exercised
              
              
              
              
              
              
              
              
              
              
              1,600,554
              
              
              
              4,002
              
              
              
              923,616
              
              
              
              
              
              
              
              927,618Net
      income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              2,269,002
              
              
              
              2,269,002Balance,
      December 31, 2006
              
              
              -
              
              
              
              -
              
              
              
              12,776,690
              
              
              
              31,942
              
              
              
              17,867,945
              
              
              
              (13,940,504
              )
              
              
              3,959,383Fair
      value of stock options issued
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              274,890
              
              
              
              
              
              
              
              274,890Common
      stock issued
              
              
              
              
              
              
              
              
              
              
              243,243
              
              
              
              608
              
              
              
              449,392
              
              
              
              
              
              
              
              450,000Stock
      options/warrants exercised
              
              
              
              
              
              
              
              
              
              
              481,493
              
              
              
              1,204
              
              
              
              282,382
              
              
              
              
              
              
              
              283,586Net
      loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (1,276,059
              )
              
              
              (1,276,059
              )Balance,
      December 31, 2007
              
              
              -
              
              
              $
              -
              
              
              
              13,501,426
              
              
              $
              33,754
              
              
              $
              18,874,609
              
              
              $
              (15,216,563
              )
              
              $
              3,691,800
  See
notes to financial statements
  F-4
 PACIFICHEALTH
LABORATORIES, INC.
 Statements
of Cash Flows
  Years
      Ended December 31,2007
              
              
              2006Cash
      flows from operating activities:Net (loss)
      income
              
              $
              (1,276,059
              )
              
              $
              2,269,002Adjustments to
      reconcile net (loss) income to net cash used in operating
      activities:Deferred
      tax benefit
              
              
              -
              
              
              
              1,278,000Depreciation
              
              
              96,374
              
              
              
              50,905Allowance
      for doubtful accounts
              
              
              (10,516
              )
              
              
              12,000Equity
      instrument-based compensation/consulting expense
              
              
              274,890
              
              
              
              189,880Write-off
      of packaging inventories
              
              
              49,135
              
              
              
              -Write-off
      of inventories
              
              
              439,208
              
              
              
              -Gain
      on sale of patents/technology, net of expenses of $90,795
              
              
              -
              
              
              
              (3,909,205
              )Changes
      in:Accounts
      receivable
              
              
              (196,873
              )
              
              
              (326,399
              )Prepaid
      expenses
              
              
              32,387
              
              
              
              (25,057
              )Inventories
              
              
              (585,514
              )
              
              
              (603,496
              )Deposits
              
              
              -
              
              
              
              9,498Accounts payable and
      accrued expenses
              
              
              (488,282
              )
              
              
              (586,201
              )Deferred
      revenue
              
              
              315,679
              
              
              
              (124,871
              )Net cash used in
      operating activities
              
              
              (1,349,571
              )
              
              
              (1,765,944
              )Cash
      flows from investing activities:Purchase of property
      and equipment
              
              
              (207,218
              )
              
              
              (59,711
              )Proceeds from sale
      of patents and technology, net of expenses of
    $90,795
              
              
              -
              
              
              
              3,909,205Net
      cash (used in) provided by investing activities
              
              
              (207,218
              )
              
              
              3,849,494Cash
      flows from financing activities:Proceeds
      from common stock issuance
              
              
              450,000
              
              
              
              -Proceeds
      from common stock options/warrants exercised
              
              
              283,586
              
              
              
              927,618Repayments
      of convertible notes payable
              
              
              -
              
              
              
              (500,000
              )Proceeds of note
      payable
              
              
              79,305
              
              
              
              861,200Repayment of note
      payable
              
              
              (107,427
              )
              
              
              (946,817
              )Net cash provided by
      financing activities
              
              
              705,464
              
              
              
              342,001Net
      (decrease) increase in cash and cash equivalents
              
              
              (851,325
              )
              
              
              2,425,551Cash
      and cash equivalents at beginning of year
              
              
              2,564,038
              
              
              
              138,487Cash
      and cash equivalents at end of year
              
              $
              1,712,713
              
              
              $
              2,564,038Supplemental
      disclosures of cash flow information:Cash paid for
      interest
              
              $
              3,496
              
              
              $
              48,082Cash paid for income
      taxes
              
              $
              20,408
              
              
              $
              2,609Schedule
      of non-cash financing activity:Conversion
      of 90,909 shares of Series A Preferred Stock into 909,091shares
      of common stock
              
              $
              -
              
              
              $
              966,387
  See
notes to financial statements
  F-5
  PACIFICHEALTH
LABORATORIES, INC.
  Notes
to Financial Statements
 December
31, 2007 and 2006
   Note
A - The Company and Significant Accounting Policies
  [1]
              The
      Company:
  The
Company was incorporated in April 1995 to discover, develop, and commercialize
nutritional products that are patentable and substantiated by well-controlled
clinical trials conducted at leading university research centers. The Company’s
principal areas of focus include sports performance, weight loss, and management
of type II diabetes. The Company utilizes third-party contractors to manufacture
all products.
  On
February 22, 2006, the Company sold the trademarks, technology, and patents for
its sports nutrition brands, Accelerade®
and Endurox®
R4
® to Mott’s LLP (“Mott’s”). Such patents were held by the Company’s CEO,
Robert Portman, and assigned to the Company when such patents were issued. Under
the terms of the agreement, the Company received a $4 million upfront payment
and will receive a royalty based on future sales for a defined period, subject
to an annual limitation on the amount of the royalty.  There are no
minimum royalties. Simultaneously, the Company and Mott’s entered into a License
Agreement giving the Company the exclusive, royalty-free right to continue to
sell these products in powder, gel and pill form.  Consequently, the
Company will continue to market its current sports nutrition products in the
same manner as prior to the sale of the intellectual property
assets.  The Company’s CEO is required to provide consulting services
to Mott’s on an as-needed basis not to exceed 130 hours per year.
  [2]
              Cash
      and cash equivalents:
  The
Company considers all highly liquid investments with original maturities of
three months or less at the date of purchase to be cash
equivalents.
  [3]
              Allowance
      for doubtful accounts:
  Accounts
receivable consist of trade receivables recorded at original invoice amount,
less an estimated allowance for uncollectible accounts. Trade credit is
generally extended on a short-term basis; thus trade receivables do not bear
interest. Trade receivables are periodically evaluated for collectibility by
considering a number of factors including the length of time an invoice is past
due, the customers' credit worthiness and historical bad debt experience.
Changes in the estimated collectibility of trade receivables are recorded in the
results of operations for the period in which the estimate is revised. Trade
receivables that are deemed uncollectible are offset against the allowance for
uncollectible accounts. The Company generally does not require collateral for
trade receivables.
  [4]
              Inventories:
  Inventories
are recorded at the lower of cost or market using the first-in, first-out
("FIFO") method. The Company determines its reserve for obsolete inventory by
considering a number of factors, including product shelf life, marketability,
and obsolescence. The Company determines the need to write down inventories by
analyzing product expiration, market conditions, and salability of its
products.
  [5]
              Property
      and equipment:
  Property
and equipment are stated at cost and are depreciated using the straight-line
method over their estimated useful lives ranging from 2 to 5 years.
  [6]
              Earnings
      (loss) per share:
  Basic
earnings (loss) per common share are computed by dividing net income (loss)
applicable to common shareholders by the weighted average number of common
shares outstanding during the year. Diluted earnings per share gives effect to
all dilutive potential common shares outstanding during the year. The dilutive
effect of the outstanding stock warrants and options is computed using the
treasury stock method.  For the year ended December 31, 2007,
diluted loss per share did not include the effect of 2,408,750 options
outstanding and 938,930warrants
outstanding, respectively, as their effect would be anti-dilutive. For the year
ended December 31, 2006, diluted income per share did not include the
effect of 779,500 options outstanding, as their effect would be
anti-dilutive.
  F-6
  PACIFICHEALTH
LABORATORIES, INC.
  Notes
to Financial Statements
 December
31, 2007 and 2006
 [7]
              Revenue
      recognition:
  Sales are
recognized when all of the following criteria are met: (1) persuasive
evidence that an arrangement exists; (2) delivery has occurred or services
have been rendered; (3) the seller’s price to the buyer is fixed and
determinable; and, (4) collectibility is reasonably assured. Sales are
recorded net of incentives paid and discounts offered to customers.
  The
Company has a purchasing agreement with a significant customer for all products
sold to this customer whereby all unsold product is subject to a right of return
provision if certain minimum levels of retail sales in a 12-month period of time
from the date of initial sale are not achieved. Through December 31, 2004, in
addition to the four criteria described above, the Company recognized revenue
related to these products after analyzing retail sell-through data provided by
the customer and the Company’s expectation of future customer sell-through
trends. A new agreement was signed in April 2005 that increased minimum levels
of retail sell-through requirements. Since January 1, 2005, the Company
recognizes revenue when its major customer sells through its products to the
consumer. This change was made due to the inability to accurately estimate
future returns from this customer as the Company has previously agreed to accept
returns/discounts of product from this customer that it was not contractually
obligated to do so as well as because the Company entered into a new purchasing
agreement with this customer that increased certain sell-through minimums. As of
December 31, 2007 and 2006, shipments to this customer amounting to $559,876 and
$244,197, respectively, have been reflected as deferred revenue in the Company’s
balance sheet.
  [8]
              Research
      and development:
  Costs of
research and development activities are expensed as incurred.
  [9]
              Advertising
      costs:
  Advertising
costs are expensed as incurred.  During 2007 and 2006, the Company
recorded advertising expense of $158,716 and $104,705,
respectively.
  [10]
              Stock-based
      compensation:
  Effective
January 1, 2006, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 123R, "Share-Based Payment" ("SFAS 123R") utilizing the modified
prospective method which establishes standards for transactions in which an
entity exchanges its equity instruments for goods or services. SFAS 123R focuses
primarily on accounting for transactions in which an entity obtains employee
services in share-based payment transactions, including issuances of stock
options to employees. The Company recorded a charge of $272,334 in the year
ended December 31, 2007, representing the effect on income from continuing
operations, income before income taxes, and net income. The Company recorded a
charge of $176,261 in the year ended December 31, 2006, representing the effect
on income from continuing operations, income before income taxes, and net
income. The impact of the adoption of 123R was to reduce basic and diluted
earnings per share by $0.02 and $0.01, respectively, in the year ended December
31, 2006.
  The fair
value of each option grant on the date of grant is estimated using the
Black-Scholes option-pricing model with a volatility ranging from 110% to 119%
for 2007 and from 102% to 117% for 2006, expected life of the options of 5
years, risk-free interest rate of approximately 4% in 2007 and 5% in 2006 and a
dividend yield of 0%. The weighted average fair values of options granted during
the years ended December 31, 2007 and 2006 were $0.76 and $0.80,
respectively.
  F-7
  PACIFICHEALTH
LABORATORIES, INC.
  Notes
to Financial Statements
 December
31, 2007 and 2006
 [11]
              Segment
      information:
  The
Company operates in one business segment:  the design, development and
marketing of dietary and nutritional supplements that enhance health and
well-being.
  [12]
              Income
      taxes:
  The
Company recognizes deferred tax liabilities and assets for the expected future
tax consequences of events that have been included in the financial statements
or tax returns.  Under this method, deferred tax liabilities and
assets are determined on the basis of the differences between the tax basis of
assets and liabilities and their respective financial reporting amounts
("temporary differences") at enacted tax rates in effect for the years in which
the differences are expected to reverse. Any resulting deferred tax asset is
reduced, if necessary, by a valuation allowance for any tax benefits that are
not expected to be realized. Effective January 1, 2007, the Company adopted
Financial Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”,
(“FIN 48”). The impact of the adoption of FIN 48 had no material effect on the
Company’s results of operations or financial position.
  [13]
              Impairment
      of long-lived assets:
  Long-lived
assets, to be held and used, are reviewed for impairment whenever events or
changes in circumstances indicate that the related carrying amounts may not be
recoverable using expected future undiscounted cash flows.  When
required, impairment losses on assets to be held and used are recognized based
on the excess of the assets' carrying amount over their fair values as
determined by selling prices for similar assets or application of other
appropriate valuation techniques.  Long-lived assets to be disposed of
are reported at the lower of their carrying amounts or fair values less disposal
costs.
  [14]
              Comprehensive
      income (loss):
  The
Company does not have any comprehensive income (loss) items at December 31,
2007 and 2006.
  [15]
              Recent
      accounting pronouncements:
  In
September 2006, the FASB issued Statement of Financial Accounting Standards No.
157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value,
establishes a framework for measuring fair value, and expands disclosure
requirements regarding fair value measurement. Where applicable, this statement
simplifies and codifies fair value related guidance previously issued within
U.S. generally accepted accounting principles. SFAS 157 is effective for
financial statements issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years.  The Company does not
expect SFAS 157 to have a material impact on its results of operations or
financial condition.
  In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities - Including an Amendment of FASB Statement
No.115  (“SFAS 159”). SFAS 159 provides companies with an option to
measure, at specified election dates, certain financial instruments and other
items at fair value that are not currently measured at fair value. A company
that adopts SFAS 159 will report unrealized gains and losses on items for which
the fair value option has been elected in its financial results during each
subsequent reporting date. SFAS 159 also establishes presentation and disclosure
requirements designed to facilitate comparisons between entities that choose
different measurement attributes for similar types of assets and liabilities.
SFAS 159 is effective for fiscal years beginning after November 15, 2007. The
Company does not expect SFAS 159 to have a material impact on its results of
operations or financial condition.
  In
December 2007, the SEC issued Staff Accounting Bulletin No. 110 “Amendment of
Topic 14, Share-Based Payment”, (“SAB 110”).  SAB 110 expresses the
views of the staff regarding the use of a “simplified” method, as discussed in
SAB No. 107, in developing an estimate of the expected term of “plain vanilla”
share options in accordance with SFAS 123R (revised 2004).  The
Company does not expect SAB 110 to have a material impact on its results of
operations or financial condition.
  F-8
  PACIFICHEALTH
LABORATORIES, INC.
  Notes
to Financial Statements
 December
31, 2007 and 2006
 
 [16]
              Use
      of estimates:
  The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
certain estimates and assumptions that affect the reported amounts of assets,
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amount of revenue and expenses during
the reporting period.  Actual results may differ from these estimates.
The significant estimates and assumptions made by the Company are in the areas
of revenue recognition, inventory obsolescence, allowance for doubtful accounts,
and valuation allowances for deferred tax assets.
  [17]  Shipping
and handling fees and costs:
  Shipping
      and handling costs are included in cost of
  sales.
  Note
B - Inventories
  Inventories,
which are held at third-party warehouses and on consignment with customers,
consist of the following and include obsolescence reserves of $176,363 at
December 31, 2007 and $545,648 at December 31, 2006 which are netted against
finished goods at third party warehouse:
  2007
              
              
              2006Raw
      materials (at contract manufacturer)
              
              $
              266,624
              
              
              $
              531,995Work
      in process (at contract manufacturer)
              
              
              67,920
              
              
              
              77,771Packaging
      supplies (at third party warehouse)
              
              
              56,480
              
              
              
              41,378Finished
      goods (at third party warehouse)
              
              
              1,358,378
              
              
              
              1,165,188Finished
      goods (on consignment)
              
              
              261,044
              
              
              
              96,943$
              2,010,446
              
              
              $
              1,913,275
  Note
C - Property and Equipment
  Property
and equipment consist of the following:
  2007
              
              
              2006Furniture
      and equipment
              
              $
              616,675
              
              
              $
              431,624Molds
      and dies
              
              
              159,494
              
              
              
              137,327776,169
              
              
              
              568,951Less
      accumulated depreciation
              
              
              591,162
              
              
              
              494,788$
              185,007
              
              
              $
              74,163
  Depreciation
expense aggregated $96,374 and $50,905 for the years ended December 31,
2007 and 2006, respectively.
    F-9
  PACIFICHEALTH
LABORATORIES, INC.
  Notes
to Financial Statements
 December
31, 2007 and 2006
 Note
D - Notes Payable
  The
Company has notes payable as follows:
  2007
              
              
              2006Installment
      note payable to insurance finance companydue in monthly
      installments of $8,168, includinginterest at 6.48%
      through February 2008
              
              $
              16,205
              
              
              
              -Installment
      note payable to insurance finance companydue in monthly
      installments of $7,104, includinginterest at 6.50%
      through February 2007
              
              
              -
              
              
              $
              7,104Installment
      note payable to insurance finance companydue in monthly
      installments of $3,722, includinginterest at 7.53%
      through October 2007
              
              
              -
              
              
              
              37,223$
              16,205
              
              
              $
              44,327
  Note
E – Convertible notes payable
  On August
24, 2005, the Company entered into a Securities Purchase Agreement (the
“Purchase Agreement”) with Hormel Health Labs, LLC
(“Hormel”).  Pursuant to the Purchase Agreement, Hormel loaned the
Company the principal amount of $500,000 in exchange for a Secured Convertible
Promissory Note, which amount would accrue interest at a rate of 8% per annum
(the “Note”).  The outstanding principal balance under the Note and
any accrued but unpaid interest thereon was due and payable on August 24, 2007
to the extent that Hormel had not exercised certain conversion rights under the
Note. In the event we defaulted, interest on the outstanding principal balance
would accrue at the rate of 10% per annum.  The Note was
collateralized by a subordinated lien on and security interest on the Company’s
assets pursuant to the terms of a Security Agreement between the Company and
Hormel dated August 24, 2005.  As additional consideration for the
loan, Hormel had the right at Hormel’s option to convert the outstanding
principal amount and accrued and unpaid interest of the Note into shares of the
common stock of the Company (the “Common Stock”), at a price per share equal to
the product of (x) the weighted average closing price of the Common Stock for
the five trading days preceding the notice of conversion of the Note and (y)
0.85.  Hormel agreed that it would not convert the Note if such
conversion would cause Hormel, together with its affiliates, to beneficially
own, on an as-converted basis, more than 9.9% of the shares of Common Stock then
outstanding. However, Hormel had the ability to waive this limitation by
providing written notice of such waiver to the Company with the waiver to be
effective seventy-five days after receipt.On
February 22, 2006, the Company repaid the principal and accrued interest of this
Note in full.
  Note
F - Stockholders' Equity
  The total
number of shares of all classes of stock which the Company has authority to
issue is 51,000,000 shares, consisting of (a) fifty million (50,000,000)
shares of common stock, par value $.0025 per share, and (b) one million
(1,000,000) shares of preferred stock, par value $.01 per share. The preferred
stock may be issued in one or more series, and may have such voting powers, full
or limited, or no voting powers, and such designations and preferences as shall
be stated in the resolution or resolutions providing for the issue thereof
adopted by the Board of Directors of the Company, from time to
time.
  On
January 28, 2005, the Company entered into a Series A Preferred Stock Purchase
Agreement and related agreements with Hormel pursuant to which the Company
issued and sold 90,909 shares of Series A Preferred Stock for an aggregate
purchase price of $1,000,000 or $11.00 per share. The Series A Preferred Stock
issued to Hormel was convertible into an aggregate 909,091 shares of common
stock, subject to adjustment. The Series A Preferred Stock was converted on June
23, 2006.
  F-10
  PACIFICHEALTH
LABORATORIES, INC.
  Notes
to Financial Statements
 December
31, 2007 and 2006
 Note
G - Commitments
  [1]
              Employment
      agreements:
  The
Company entered into a new employment agreement on January 1, 2007, with the CEO
of the Company that provides for minimum annual compensation of $295,000. In the
event of a change in control, as defined in the employment agreement, the CEO
shall be paid, as additional compensation, a lump sum equal to his annual base
salary in effect immediately prior to the change in control. If the CEO is
terminated without cause, as defined in the employment agreement, the Company
shall pay the CEO, at the time of termination, an amount equal to the base
salary which would have been paid during a period beginning on the date of
termination of employment and ending on the later of the scheduled termination
date, as defined in the employment agreement, or the first anniversary of the
termination date.
  The
Company entered into an employment agreement on January 3, 2008, with the new
President and Chief Operating Officer of the Company that provides for minimum
annual compensation of $295,000. In the event of a change in control, as defined
in the employment agreement, and a contemporaneous or subsequent termination of
Employee for Good Reason, the President shall be paid, as additional
compensation, a lump sum equal to half his annual base salary in effect
immediately prior to the change in control. If the President is terminated
without cause, as defined in the employment agreement, the Company shall pay the
President, at the time of termination, an amount equal to his annual base salary
which would have been paid during a period beginning on the date of termination
of employment and ending on the later of the scheduled termination date, as
defined in the employment agreement, or the first anniversary of the termination
date, to be offset by any compensation earned in other full-time
employment.
  The
Company entered into an employment agreement on January 3, 2008, with the new
Vice President, Product Development and Supply Chain of the Company that
provides for minimum annual compensation of $190,000. If this Vice President is
terminated without cause, as defined in the employment agreement, the Company
shall pay him, at the time of termination, an amount equal to four months of his
base salary which would have been paid during a period beginning on the date of
termination of employment and ending on the later of the scheduled termination
date, as defined in the employment agreement, or four months from the
termination date, to be offset by any compensation earned in other full-time
employment.
  [2]
              Lease:
  The
Company has a lease agreement for office space for the rental of 5,500 square
feet expiring June 2012.
  The
future minimum lease payments due under the lease is as follows:
  Years
      EndingDecember
      31,2008
              
              $
              140,2502009
              
              
              140,2502010
              
              
              143,0002011
              
              
              148,5002012
              
              
              75,625$
              647,625
  Rent
expense amounted to $118,145 and $136,125 in 2007 and 2006,
respectively.
  Note
H - Stock Option Plans and Warrants
  The
Company has two stock option plans (the "Plans") under which 375,250 shares of
common stock are available for issuance under the Plans. In 1995, the Company
established an incentive stock option plan (the "Plan") in which options to
purchase the common stock of the Company may be awarded to
employees.  In 2000, the Company established another stock option plan
to increase the number of options under the Plans.
  F-11
  PACIFICHEALTH
LABORATORIES, INC.
  Notes
to Financial Statements
 December
31, 2007 and 2006
 Stock
options may be granted as either incentive stock options intended to qualify
under Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), or as options not qualified under Section 422 of the
Code.  All options are issued with an exercise price at or above 100%
of the fair market value of the common stock on the date of
grant.  Incentive stock option plan awards of restricted stock are
intended to qualify as deductible performance-based compensation under
Section 162(m) of the Code.  Incentive stock option awards of
unrestricted stock are not designed to be deductible by the Company under
Section 162(m).  The Board of Directors determines the option
price (not to be less than fair market value for incentive options) at the date
of grant. The options have a maximum term of 5 years and outstanding options
expire at various times through December 2012.  Vesting ranges from
immediate to over five years.
  Stock
option transactions for employees during 2007 and 2006 were as
follows:
  WeightedExercise
              
              
              AveragePrice
      Per
              
              
              Exercise
      PriceOption
              
              
              Vested
              
              
              Common
              
              
              Per
      ShareShares
              
              
              Shares
              
              
              Share
              
              
              OutstandingBalance,
      January 1, 2006
              
              
              1,970,000
              
              
              
              1,747,000
              
              
              $
              0.313
      - $4.34
              
              
              $
              1.11Granted/vested
      during the year
              
              
              913,000
              
              
              
              193,000
              
              
              $
              0.20
      - $1.13
              
              
              $
              0.81Exercised
      during the year
              
              
              (648,000
              )
              
              
              (648,000
              )
              
              $
              0.313
      - $1.00
              
              
              $
              0.46Expired
      during the year
              
              
              (223,500
              )
              
              
              (222,500
              )
              
              $
              0.20
      - $4.34
              
              
              $
              1.63Balance,
      December 31, 2006
              
              
              2,011,500
              
              
              
              1,069,500
              
              
              $
              0.20
      - $3.80
              
              
              $
              1.12Granted/vested
      during the year
              
              
              741,000
              
              
              
              418,668
              
              
              $
              0.65
      - $2.14
              
              
              $
              0.76Exercised
      during the year
              
              
              (81,000
              )
              
              
              (81,000
              )
              
              $
              0.20
      - $1.00
              
              
              $
              0.65Expired
      during the year
              
              
              (333,000
              )
              
              
              (333,000
              )
              
              $
              2.79
      - $3.80
              
              
              $
              2.89Balance,
      December 31, 2007
              
              
              2,338,500
              
              
              
              1,074,168
              
              
              $
              0.20
      - $2.14
              
              
              $
              0.77Aggregate
      Intrinsic Value,December
      31, 2007
              
              $
              13,825
              
              
              $
              13,825
   The
market value of the Company’s common stock as of December 31, 2007 was $0.55 per
share.
  As of
December 31, 2007, the total fair value of non-vested awards amounted to
$705,336. The weighted average remaining period over which such options are
expected to be recognized is 3.11 years.
  Information
with respect to employee stock options outstanding and employee stock options
exercisable at December 31, 2007 is as follows:
  WeightedAverage
              
              
              Weighted
              
              
              
              
              
              WeightedRemaining
              
              
              Average
              
              
              
              
              
              AverageRange
      of
              
              
              Number
              
              
              Contractual
              
              
              Exercise
              
              
              Number
              
              
              ExerciseExercise
      Prices
              
              
              Outstanding
              
              
              Life
      (in Years)
              
              
              Price
              
              
              Exercisable
              
              
              Price$
              0.31
      - $2.00
              
              
              
              2,312,500
              
              
              
              3.35
              
              
              $
              0.76
              
              
              
              1,074,168
              
              
              $
              0.74$
              2.01
      - $4.00
              
              
              
              26,000
              
              
              
              4.19
              
              
              $
              2.12
              
              
              
              -
              
              
              
              -2,338,500
              
              
              
              3.36
              
              
              $
              0.77
              
              
              
              1,074,168
              
              
              $
              0.74
  In
addition to options granted to employees under the Plans, the Company issued
stock and stock options pursuant to contractual agreements to
non-employees.  Stock and stock options granted under these agreements
are expensed when the related service or product is provided. The Company used
the Black-Scholes method of valuing stock options to recognize an expense of
$2,556 and $13,619 for such stock and stock options issued in 2007 and 2006,
respectively.
  F-12
 
  PACIFICHEALTH
LABORATORIES, INC.
  Notes
to Financial Statements
 December
31, 2007 and 2006
 Stock
option transactions for non-employees during 2007 and 2006 were as
follows:
  WeightedExercise
              
              
              AveragePrice
      Per
              
              
              Exercise
      PriceOption
              
              
              Vested
              
              
              Common
              
              
              Per
      ShareShares
              
              
              Shares
              
              
              Share
              
              
              OutstandingBalance,
      January 1, 2006
              
              
              155,500
              
              
              
              155,500
              
              
              $
              0.20 -
      $6.30
              
              
              $
              1.57Granted/vested
      during the year
              
              
              90,500
              
              
              
              90,500
              
              
              $
              0.20 -
      $1.23
              
              
              $
              0.23Exercised
      during the year
              
              
              (58,000
              )
              
              
              (58,000
              )
              
              $
              0.20
              
              
              $
              0.20Expired
      during the year
              
              
              (97,500
              )
              
              
              (97,500
              )
              
              $
              0.89 -
      $6.30
              
              
              $
              1.34Balance,
      December 31, 2006
              
              
              90,500
              
              
              
              90,500
              
              
              $
              0.20 -
      $4.88
              
              
              $
              1.35Granted/vested
      during the year
              
              
              2,250
              
              
              
              2,250
              
              
              $
              1.21 -
      $2.10
              
              
              $
              1.61Expired
      during the year
              
              
              (22,500
              )
              
              
              (22,500
              )
              
              $
              0.90 -
      $4.88
              
              
              $
              4.36Balance,
      December 31, 2007
              
              
              70,250
              
              
              
              70,250
              
              
              $
              0.20 -
      $2.10
              
              
              $
              0.39
  Information
with respect to non-employee stock options outstanding and non-employee stock
options exercisable at December 31, 2007 is as follows:
  WeightedNumber
              
              
              Average
              
              
              WeightedOutstanding
              
              
              Remaining
              
              
              AverageRange
      of
              
              
              and
              
              
              Contractual
              
              
              ExerciseExercise
      Prices
              
              
              Exercisable
              
              
              Life
      (in Years)
              
              
              Price$0.20
      - $2.00
              
              
              
              69,250
              
              
              
              1.53
              
              
              $
              0.37$2.01
      - $2.10
              
              
              
              1,000
              
              
              
              2.16
              
              
              $
              2.1070,250
              
              
              
              1.54
              
              
              $
              0.39
  Stock
warrant transactions during 2007 and 2006 were as follows:
  Exercise
              
              
              WeightedPrice
              
              
              AveragePer
              
              
              Exercise
      PriceCommon
              
              
              PerWarrants
              
              
              Share
              
              
              Common
      ShareBalance,
      January 1, 2006
              
              
              2,271,275
              
              
              $
              0.63
      - $0.88
              
              
              $
              0.67Exercised
      during the year
              
              
              (919,565
              )
              
              $
              0.63
      - $0.85
              
              
              $
              0.72Balance,
      December 31, 2006
              
              
              1,351,710
              
              
              $
              0.63
      - $0.88
              
              
              $
              0.64Exercised
      during the year
              
              
              (412,780
              )
              
              $
              0.63
              
              
              $
              0.63Balance,
      December 31, 2007
              
              
              938,930
              
              
              $
              0.63
      - $0.88
              
              
              $
              0.64
   F-13
   PACIFICHEALTH
LABORATORIES, INC.
  Notes
to Financial Statements
 December
31, 2007 and 2006
 Note
I - Income Taxes
  The
difference between the statutory federal income tax rate on the Company's
pre-tax income (loss) and the Company's effective income tax rate is summarized
as follows:
  2007
              
              
              2006Amount
              
              
              Percent
              
              
              Amount
              
              
              PercentU.S.
      federal income tax provision(benefit) at federal
      statutory rate
              
              $
              (446,620
              )
              
              
              35%
              
              
              $
              1,241,450
              
              
              
              35%Effect
      of state taxes, net offederal
      benefit
              
              
              (76,560
              )
              
              
              6%
              
              
              
              212,820
              
              
              
              6%Change
      in valuation allowance
              
              
              411,600
              
              
              
              (32%
              )
              
              
              (11,000
              )
              
              
              0%Stock
      compensation expense,  (SFAS123R)
              
              
              112,700
              
              
              
              (9%
              )
              
              
              -0-
              
              
              
              0%Other
              
              
              (1,120
              )
              
              
              (0%
              )
              
              
              (165,270
              )
              
              
              (5%
              )$
              0
              
              
              
              0%
              
              
              $
              1,278,000
              
              
              
              36%
  Included
in the other component in 2006 is the utilization of net operating losses in
excess of the expected amount as recorded as of December 31, 2006.
  At
December 31, 2007, the Company has approximately $13,390,000 in federal and
$4,066,000 in state net operating loss carryovers that can be used to offset
future taxable income.  The net operating loss carryforwards begin to
expire in the year 2015 through the year 2027.
  The
components of the Company's deferred tax assets are as follows:
  2007
              
              
              2006Net
      operating loss carryforwards
              
              $
              4,931,000
              
              
              $
              4,380,000Inventory
      reserve
              
              
              72,000
              
              
              
              224,000Other
              
              
              62,000
              
              
              
              49,000Valuation
      allowance
              
              
              (5,065,000
              )
              
              
              (4,653,000
              )Deferred
      tax asset
              
              $
              - 0
      -
              
              
              $
              - 0
      -
    Note
J - Concentrations of Credit Risks, Major Customers, and Major
Vendors
  [1]
              Concentrations
      of credit risk:
  Financial
instruments, which potentially subject the Company to concentrations of credit
risk, consist primarily of cash, cash equivalents and trade accounts
receivable.
  The
Company has concentrated its credit risk for cash by maintaining substantially
all of its depository accounts in two financial institutions. Amounts at one of
the institutions are insured by the Federal Deposit Insurance Corporation up to
$100,000 and amounts at the other institution are insured by the Securities
Investor Protection Corporation up to $500,000. Uninsured balances aggregated
approximately $1,150,000 at December 31, 2007 that exceeded these insured
amounts. These financial institutions have a strong credit rating, and
management believes that credit risk relating to these deposits is
minimal.
  F-14
  PACIFICHEALTH
LABORATORIES, INC.
  Notes
to Financial Statements
 December
31, 2007 and 2006
 The
Company does not require collateral on its trade accounts
receivable.  Historically, the Company has not suffered significant
losses with respect to trade accounts receivable.
  [2]
              Fair
      value of financial instruments:
  Cash,
cash equivalents, accounts receivable, accounts payable and notes payable
approximate their fair values due to the short-term maturity of these
instruments.
  [3]
              Major
      customers:
  For the
years ended December 31, the Company had product sales from two customers
that accounted for approximately 21% and 15% in 2007 and 20% and 19% in 2006, of
net product sales.  Accounts receivable outstanding related to these
customers at December 31, 2007 and 2006 were $435,845 and $207,235,
respectively.  Deferred revenue from one of these customers was
$559,876 as of December 31, 2007 and $244,197 as of December 31, 2006. Such
amounts are included in the accompanying balance sheet. The loss of these
customers, a significant reduction in purchase volume by these customers, or the
financial difficulty of such customers, for any reason, could significantly
reduce our revenues. We have no agreement with or commitment from either of
these customers with respect to future purchases.
  [4]
              Major
      vendors:
  Two
suppliers accounted for approximately 69% and 22%, respectively, of total
inventory purchases for the year ended December 31, 2007 and two suppliers
accounted for 54% and 18%, respectively, of total inventory purchases for the
year ended December 31, 2006.  At December 31, 2007, amounts due to
these two vendors represented approximately 45% and 1%, respectively, of
accounts payable and accrued expenses.  At December 31, 2006, amounts
due to two vendors represented approximately 25% and 20%, respectively, of
accounts payable and accrued expenses.
  Note
K - Segment and Related Information
  In 2007
and 2006, the Company has one reportable segment:
 Dietary
and nutritional supplements.
  The
following table presents revenues by region:
 2007
              
              
              2006United
      States
              
              $
              6,778,183
              
              
              $
              5,751,148Canada
              
              
              208,649
              
              
              
              178,556Other
              
              
              441,025
              
              
              
              280,142Total
              
              $
              7,427,857
              
              
              $
              6,209,846
  Product
sales for the years ended December 31, 2007 and 2006 are net of credits of
$318,094 and $216,177, respectively, for marketing promotions, customer rebates,
and returns of certain products.  These credits primarily relate to
the sports performance product line.
  Note
L – Related Party Transactions
  In
connection with the Hormel preferred stock agreement, the Company entered into
an Exclusive Manufacturing Agreement with a subsidiary of Hormel. The initial
term of the agreement was for one year commencing on January 28, 2005 and was
extended until January 28, 2007 as part of the convertible note transaction.
During the years 2007 and 2006, the Company purchased approximately $166,000 and
$1,991,000, respectively, of finished goods from this Hormel subsidiary. At
December 31, 2007 and December 31, 2006, the Company owed this Hormel subsidiary
approximately $-0- and $195,000, respectively, that has been included on the
balance sheet in accounts payable and accrued expenses.
  F-15